“How much is my business worth?” This is one of the most common questions asked by anyone who's even remotely considered selling their business. It is also one of the biggest stumbling blocks in starting to prepare a business for sale. Business owners don’t know where to start or who to ask.
You want to make sure you are getting the right advice from the right people. There are a number of different people and resources that are able to help you value your business, and some are better than others.
When you are selecting someone to help to value your business it’s important to look for those who are qualified to do this specific role and who have a good track record. Look beyond their years of experience, because this may only show they have been doing an ordinary job for a long time. Focus more on the results they have achieved and the testimonials they can deliver to you.
A list of occupations and resources that routinely place valuations on businesses includes:
Many people first go to their accountant. There are a few points to consider when bringing them on as the person to value your business. Are they local or at least do they have a good understanding on what is happening in your location, industry and do they have similar businesses to yours in their portfolio? If you know your accountant well and they know you and your business well, then they will have a good insight into how your business is running and the potential of your business. Ultimately you want to know how many of their clients with similar businesses have sold in the last 12 to 18 months. If this is their specialty, great! If not, then they may be able to direct you to a person who has a good track record in this area.
Often these are people you have not had a past relationship with, however this is their primary focus. Something to bear in mind is who the certifier works for. We have had an example where a business needed to extend their credit, one of the terms was that they needed to get their business valued and to pay for the valuation. They made the mistake of thinking the valuer was therefore working for them when in fact they were working for the bank. It was in the bank's interest to have a lower value on the business to minimize their risk and exposure. Understandably the valuation came in much lower than was expected and the business owner was very disappointed. Be very clear with the valuer as to the reason why you want the business valued and whose interest the valuer is looking after!
Your qualified business advisor, who is experienced in helping clients prepare and sell their businesses, can give you a good indication of what the current state of the market is. Similar to your accountant, their skill base will depend on their exposure to the business-selling market and whether valuing businesses is something they specialize in. They may be great people to help you increase the value of your business and guide you through the sales process, however they may not be best suited to helping you value your business.
Real estate agents.
Many real-estate agents get involved in business sales because it often involves the sale of property. Most real estate agents specialize in selling real estate and not businesses. A good track record in selling businesses and having a number of business in their portfolio that are getting good exposure is a good indication of whether a real estate agent is the right person to help you value your business.
Beware of agents and brokers that have a vested interest in you listing your business with them, this is how they make their money. Since they get paid primarily upon sale, for them any sale is better than no sale. Less than honest agents and brokers can over inflate the value of your business, enticing you to list your business with them. They can also undervalue your business to entice as many buyers in an effort to get enquiries. It is surprising how often we have heard of business owners who have made this mistake because they feel that at last they have met someone who really understands how much their business is worth ... when this isn’t really the case.
A fulltime business broker who has made selling businesses their profession is generally someone that you would like to think has the experience, knowledge, and skills to be able to help you sell your business. As per the previous point, be aware that they have a vested interest in getting you to list your business with them. It is always good to understand how they make their money; often paying up front for a valuation is a better way of getting an accurate one.
Online business valuations.
There are a number of online business valuation tools, the challenge with these are ‘rubbish in, rubbish out.’ The results will vary depending on the quality of the information you put in, but also the rigor behind the actual calculations. For example, a business is more likely to sell for a higher value in a major metropolitan area that is booming, versus a similar sized business in a small regional town that is having it really tough. These online tools won’t disclose how they calculate the value of your business, however based on the type of information that you are required to input can give you some indication of the value of your business.
Newspaper and internet listings.
These give you an opportunity to see what other people are listing their business for sale for, however it does not give you any indication of what the actual businesses sold for. Very often a business is marked as sold with the original asking price still being displayed when in reality the business has sold for significantly less.
Merger and acquisitions specialists.
Usually merger and acquisition specialists get involved with larger businesses. What is very important here is being clear on who they are working for and how they make their money. If you get approached by someone on behalf of another company that may be interested in buying your business it is highly likely that they are working for the potential buyer of your business and have their best interests at heart, not yours.
Sadly, this is one of the most common forms of business valuations. Standing around the BBQ, someone with little or no experience and a very strong opinion will try and tell you what your business is worth. “BBQ stories” often include inflated figures or leave out the details like the payment terms and commitments the seller had to make to get the amazing selling price. Be careful of asking the wrong person for the right advice.
One of the easiest ways to get started towards understanding the value of your business is to identify three to five of the above people or resources to value your business. This will give you a range of what your business may be worth in its current state and in the current market.
Good questions to ask include what results they have achieved with other businesses, whether they have any testimonials, as well as the expected time frame it would take to sell your business at that price.
Getting the best sales price and deal when selling your business starts with establishing a realistic valuation. Getting an understanding of what your business is worth is important to do early in the process because this is the starting point for many decisions.