We have been tackling the tougher topics of succession over the past couple of months, easing into the challenges that business owners face as they make their way through the journey of transitioning out of their business. Nothing quite amounts to the topic of valuation though. So let’s tackle it head on, shall we?
What is it?
First, the low hanging fruit. What is valuation? Valuation is what your business is actually worth. If we draw upon the analogy of selling your house, this would be the closest value to what you see on a property assessment. It is an objective amount based on a number of contributing factors, and is naturally best assessed by someone who does not work within the business. There are a number of techniques that can work towards a valuation, but knowing what the principle is is important.
How does it work?
Now, a business valuation amount is not necessarily the asking price for the business, but it is definitely the best place to start. For many, you can talk to your accountant about the worth of your business, but understand that not all accountants know how to calculate the value of the business much past looking at your assets and income and loss statements.
Some accountants, and even M&A professionals will insist that the EBIDTA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a step in the direction towards a proper business valuation. While they aren’t wrong, it is important to keep in mind that EBIDTA does not support the representation of any of the debts the business might hold. This sets a sale up for some potentially nasty surprises for the buyer when the Due Diligence process does a deep dive into the financials.
What do I do next?
If you really wish to take the best path and set your sale up for success, you will invest in a third party valuation. This involves a qualified professional visiting your business, looking at your finances and assests, and determining a value for your business from an objective perspective. Not only does this help you to more accurately land on a reasonable asking price for your business, but it also tells any potential buyers or investors that your pricing is legit, and gives you some leverage on future negotiations.
A valuation is not mandatory for your business sale, but it helps. If you decide you do not want to hire a valuator, the best step is to talk to your accountant. Ask them if they have managed business sales in the past, and if they don’t have that sort of experience, chances are they know someone who has and offer up a recommendation.