What is my business worth? What is my business, and what is worth…
By: Hendrik Oudeman
Featured article at Gold News
About valuation, preparation & monitoring…
There is this old tale of a small boy in a little village that couldn’t find his mother. So people in the village asked him how the mother looked like and the boy answered it was the most beautiful woman that ever lived. The villagers were looking around and came up with names of the well-known beauties in town, but none of them were his mother. Then a very simple looking woman walked in the village and the little boy ran into her arms: his mother. To that boy his mother was the most beautiful person, no matter how she looked to others.
This tale tells exactly how most business owners feel about their business. And therefore it is very hard for a third person to appreciate that business as the owner (and often founder) does. When the owner wants to sell the business however, it is not how he or she looks at the business that counts, but how a potential buyer would look at it.
Any serious process of selling a business should start with a third party valuation: the owner needs to get a realistic picture of what his business is worth and the professional M&A adviser should get a good understanding of the value and the value components, before deciding if he can sell the business and at what price (see below). “Professionals” that will take the representation of a business for sale without a proper valuation are likely playing the numbers game (See our article: “Do you feel lucky today”)
A helpful way to realize the need for a valuation is to ask yourself the following question:
“Do I (the business owner) know exactly what the value of my business is today when asked by an interested party (buyer)?”
Now, many owners will say they have a pretty good idea and that they are perfectly able to explain how valuable their company is to any “serious” buyer. It is often suggested that a buyer, that does not see the value as the owner does, is not a serious buyer!
Let’s go over the question of value, word for word and explain in detail what each part of the question means:
|Do I…||meaning you, the owner, not anyone else’s opinion or calculation!|
|know exactly…||meaning no educated guesses here, but hard proof!|
|what the value…||meaning value as in the worth of the assets, the potential to make a profit and earn salaries, based on past performance, or future cash flow, comparing with other businesses etc. in euros, in one single pay-out or with payment conditions?|
|of my…||meaning mine as in one single owner or are there any other share-holders (is there a (ex-) spouse, nuptial agreement?)|
|business…||meaning your company’s shares or all or some of the assets, tangible and intangible, on the balance sheet, at the right value, including or not the accounts payable, the creditors, loans and guarantees, bank accounts, patents, clients lists, tax contingencies?|
|is today…||meaning right now, not based on last year or the last available figures or the better times in the past or the promising (but uncertain) future!|
|when asked by an
interested party… ?
|meaning a serious buyer (you know how to separate the serious from the curious, right? and how to find them?) with what purpose to buy what (see above: ”… business ..”): enter the market, eliminate a competitor, close and sell in pieces, find a new niche etc.|
Going over this question like that will open the eyes of most business owners that it is not that easy to answer what seems to be a simple, straight-forward question. And if you are not sure about the value of your business, then consider this:
You then need to realize that value is not the same as price (value is what you have, price is what you ask), and that that price most likely is not what a buyer will pay and what a buyer will pay is not what an owner will receive (in his pocket).
A properly valued company, with up-to-date and transparent records is an entirely different “product” to sell than an owners’ “I did it my way” business, with a “that’s the way I like it” administration without proper documentation, or well-defined and classified figures.
You want to negotiate the sale of your company for the right price and on terms you can accept; you do not want to spend your meetings with serious buyers giving explanations and corrections all the time, about all sorts of data that is lacking or is not complete or correct or understood; financial statements that are not clearly defined or classified; or trying to justify what is not supported by documents or explaining what is just plainly wrong.
No serious buyer will stick around that process and you will end with no sale, or a sale at very unfavorable conditions.
Failing to plan (prepare) is planning to fail; if you do not care to get a professional valuation for your business, do not expect to attract professional acting potential buyers!