2 critical concepts for calculating business value
There are only two types of business owners – those who plan to exit and those who have to exit. Both need exit planning that maximizes business value.
Often, institutional buyers will empower their deal-maker to spend up to a certain price buying a business. At that point the deal-maker is spending OPM (other people’s money) so you could argue he doesn’t care how much he pays. From my background as a buyer, I can assure you that if the seller knows the value of their business, I would never hesitate to pay up to the full authorized amount if I had to do so.
By the same token, if you don’t know the value of your business, I will steal it from you and then I will sleep like a baby tonight because that is my job. It is not the buyer’s responsibility to look out for the seller’s interest.
What’s the key to business value?
Most business owners wait until the day they sell their business to learn what they should have known years before about their value. So, what is the key to value? Is it the multiples that your accountant told you about? Is it the inventory and equipment?
Sellers often assume that hard assets are a key to value. If that is the case, then why do consultants and brokers sell their businesses for huge amounts of money when they have no hard assets?
In most industries buyers use multiples to convince sellers that a price is correct and non-negotiable. Some recent deals resulted in ridiculous prices that no formula could have calculated. Did the buyers lose their minds or did the sellers know what they were doing?
Most sellers assume that professional buyers would buy a business for the same reasons a seller would and that is just not true. Unless you understand where your business value resides, you are never going to be able to sell your business for its maximum value.
2 critical concepts for maximizing value
There are 2 key concepts you need to be aware of in relation to your businesses value: recasting and intangible assets.
Recasting is the process where you restate your financials in order to accurately highlight the company’s true profitability, while intangible assets are off-balance sheet items that, to many buyers, add value to your opportunity.
Both of these are critical when analyzing a business’s value.