Valuation – “Part Art, Part Science”

by | April 27, 2012

Often in our practice we hear business owners talk about the “fair market value” of their business, or speak of obtaining a valuation of their business as a definitive answer.  Business owners often have the perception that a valuation is absolute, objective, and definitive.  It’s the final word, right?

Far from it.  We learned this month through our guest blog posts and the Focus presentation that there are many different ways to value a business, and many different reasons to obtain a valuation.  Furthermore, a low valuation is not the end of the line. There are ways to positively and legitimately tweak a valuation by making structural or procedural changes in the business, ultimately resulting in a higher value.

One of the most important factors in being able to set a high value on your business is transferability.  The business may be wildly profitable, with a fabulous reputation, but if these elements are inexorably tied to the business owners, those elements are not transferable.  If the business is highly efficient and productive, but its processes and procedures are not written down clearly but are in the heads of long-time employees then those elements aren’t transferable either.  If the business has many   long-established customer accounts but no clear contracts with those customers, it may be difficult to transfer these elements as well.

Instead of viewing a valuation as an end product, consider using it as your starting point.  Getting a valuation early, before you may even be thinking of selling your business, will give you the opportunity to increase the transferability and therefore increase the value of the business.  This is true even if the sale is to an insider in the business, such as one of the other owners in the business, or to an employee.

Valuations can be confusing and intimidating, and are often disappointing.  However, by viewing it as a tool and a starting place, it can be incredibly helpful if your ultimate goal is to increase the actual value of your business.