What’s my business worth? If I get it valued does that mean that’s what I’ll get when I sell?

Pretty much the first question most business owners ask when they start to think about selling.

Getting an ‘expert’ to tell you what they think your business is worth is a common first step to help owners answer that question.

• But which expert do I ask? 
• Is it worth paying for a professional valuation? Or can’t I just rely on a free appraisal? 
• Why would I even bother with a valuation? Wouldn’t it be better to just put it on the market and see what buyers will be prepared to pay? 

If maximising the cheque you get when you sell is important for your personal financial planning, then read on. 

In this article we;

1. Explain a few small business valuation basics, to help you make sense of any valuation advice you receive, and 
2. Give you some practical tips for using valuations to help you get the highest possible sale value. 

If you have absolutely no idea what your business is worth, or are getting wildly different answers when you ask some of your trusted business advisers and business friends, then a business valuation or appraisal from an ‘expert’ can be a great starting point. 

But before you can work out whether an expert or their valuation will help you need to know some not-so-well-understood business valuation basics.

Some small business valuation basics

All business valuations are opinions.

And you know what they say about opinions. Everybody has one!

This holds true regardless of whether it’s;

1. Warren Buffett,
2. Your mate down the road,
3. The world’s greatest accountant, or
4. A potential buyer.

As a result there are many different potential opinions on the answer to the question of what your business is worth. 

To get the business sale outcome you need to;

1.  Accept that some are way more useful than others.
2. Better understand how these different opinions are formed,
3. How to shift the negotiations closer to your opinion of value. 

The earlier you get a valuation done the better off you will be.

When done earlier you have time to understand what drives value and then change those drivers. 

Typically most owners don’t allow anywhere near enough time. As a result they seek out, and unfortunately rely on, not-so-quality professional advice that is either plain biased or just completely out of date. More on this in the following paragraph.

To get a better business sale outcome you should be planning a few years out. 

And this is where an early, quality, professional valuation of your business can be really effective in kick-starting your sale planning. 

So if you have been in your business for more than 20 years, or are in your 50’s or older, the time to start is now.

Business valuations can go out of date really quickly, so don’t take your foot off the accelerator.

You can’t sit back and relax once you have a valuation done.  

A bad week or month of trading can make a recent valuation completely irrelevant 

There is no guarantee that your valuation will equal your selling price!

But that doesn’t mean you don’t need one. More on this later.

Paid business valuations. 

Paid professional valuations are just professional opinions of value based on certain assumptions and selective use of information including;

1. Which financial years they have used in their calculations e.g. have they averaged the last 3 years of profit or used just the most recent year? The choice can make a massive difference to the end valuation they calculate.
2. What assumptions are used? You can’t complete a business valuation without using some but they can be so broad and subjective. 
3. What other data has been relied on or used? The availability of quality comparable small business valuation data e.g. what other businesses like yours actually sold for, is very limited. 

But a paid valuation from a business valuation expert, who is not also helping you sell the business, should help you better understand both;

1. Potential worth of your business today, and 
2. The key drivers that determine business profit and therefore value 

This kind of valuation is also a far more independent baseline value that you can confidently use to;

1. Assess any shortfall between potential net business sale proceeds, and what you personally need for retirement or to acquire another business with,
2. Better understand what changes you can make to increase profit and value.

Paying for a valuation is no guarantee that’s what you’ll get for your business when you sell, but it an be very helpful in ensuring you eventually sell for the most money you can. 

Free market appraisals. 

Free appraisals won’t cost you anything now, but in the long run they may cost you a lot of time and money.

Be very wary of free appraisals.

For all of the reasons I outlined in the last paragraph valuing any business is complex. To do it properly takes time and professional expertise.

And, that’s why it can often cost thousands of dollars. 

As I outlined in the last paragraph I think a paid valuation from a professional valuer can be a great investment, when it’s done at the right time and used in the right way.

However the reality is many owners;

1. Balk at paying for a valuation, or 
2. Don’t really understand the value of a professional valuation, or 
3. Are in a hurry to sell and are happy to let ‘the market’ tell them what their business is really worth by listing their business for sale and seeing what buyers offer.   

This is where ‘free’ appraisals can seem attractive. And there are many business brokers who are happy to oblige. 

But before relying on their ‘free’ appraisal you need to understand that;

1. Their expertise is selling businesses. While in theory they will try to get the highest value they can, their motivation is often more about getting a quick sale at any price they can, and 
2. They earn their money only when a business sells.

Those offering ‘free’ appraisals will fall into 2 camps. 

Camp 1 (promoting the lowest potential value) 

In the first camp are those who undertake a ‘free’ appraisal that involves the absolute minimal amount of effort aimed at quickly working out;

1. The absolute lowest price you (the owner) would sell at, and 
2. If they think they could get a buyer to quickly pay that minimum value. 

The ‘free’ appraisal is often only really about working out whether they will be wasting their time, and what chance they have of selling a business quickly and earning a commission. 

For the business broker this isn’t an unreasonable approach, all they can potentially waste a lot of time. It just means the onus is on you to work out whose interests are really being served with the ‘free’ appraisal.

There are two major downsides for you.

1. These ‘free’ appraisals will always tend to be on the low side, and
2. Because it’s about getting the quickest and easiest sale now, these ‘free’ appraisals will not focus on anything that could be done to improve future business value, because then you will be less likely to sell now.   

Camp 2 (promoting the highest possible value) 

In the other camp are business brokers or other sale advisers whose sole objective is to get the listing to sell your business. 

And the more listings they have, the higher the chance there is that one business (and it doesn’t matter which one to them) will sell. It’s a straightforward numbers game.  

As a result they will just tell you what you want to hear to get the listing i.e. your business is worth a big number that sounds like enough to retire on.

As a get-out-of-jail-free card, they’ll tell you that in the end;

“your business is only worth what a buyer will pay”.

They need a get-out-of-jail-free card because buyer don’t pay stupid prices.

It’s just a lazy, ‘hands up in the air’ attempt to say I’m not sure, or I can’t be bothered doing the work to properly value the business .

Instead let’s just see if there are any bottom feeder buyers who might put in a quick, low-ball offer so I can earn acommission. 

Under pressure to sell the slightest chance of selling for a ‘tattslotto’ number can sound attractive and, with a bit of a sales spiel, even slightly possible. 

But you’ll end up short-changed. 

Your business won’t sell because it’s over-priced. 

If there is any genuine interest you’ll be under huge pressure to reduce the price, by whatever it takes, so the business broker can get a sale and earn a commission. 

But most likely though, you’ll just waste years waiting for that mythical buyer. 

If for whatever reason you are considering asking for a ‘free’ appraisal I’d encourage you to challenge them by asking some questions, like the below,  to help you better assess if you should really rely on their ‘free’ appraisal and advice;

1. What other businesses have they sold,,and at what price?
2. Do they know what type of buyer would pay the most for the business and why?
3. What type of business sale process and over what timeframe do they propose?
4. What amount of marketing & promotion resources do they require, and is that sufficient to attract all possible buyers?

Never tell buyers your selling price.  

When you only have a limited understanding of the intricacies of small business valuation and a strong desire to sell, I completely understand why you would think a great strategy should be a simple one, like. 

Add 10% or 20% to the price you want and negotiate down a bit.

Unfortunately for many owners this isn’t the best way to achieve the maximum potential selling price.  

Regardless of whether you decide to rely on a ‘free’ appraisal or a paid professional valuation you are best to avoid using that valuation number as a Sticker Price in your marketing and promotion.

Sticker Price = the publicly advertised selling price.  

Three things always happen when lead with a Sticker Price;

1. You miss out on the opportunity to ever sell above the Sticker Price to a buyer who might have been prepared to pay more,
2. Because negotiations are always down from a Sticker Price there is an inevitable ‘race to the bottom’ driven mostly by factors other than fair value of the business e.g. business brokers wanting a sale at any price to earn a commission,
3. In some cases, you can hang on too long in selling for an out of date Sticker Price and lost a lot of time when the business suffers a decline in performance. 

The process of selling without using a Sticker Price is called Sale by Expression of Interest.

It isn’t common and while it requires more effort than the traditional selling approach. But it is also the single most effective way to test whether how your assessment of value stacks up with what genuine buyers are actually prepared to pay.  

Sale by Expression of Interest.

The end game of getting your business valued is to help you sell for the most you can in the timeframe you have. 

So you definitely need to have your opinion of what you would sell for.

But this doesn’t mean you have to share your opinion of what you would sell for in the selling process i.e. promote your expected sale price as the Sticker Price as discussed in the last paragraph.

The secret is simple.

Buyers who are genuinely interested in your business will absolutely have their own opinion on the value of your business.  

Your job is to get them to offer them their opinion.

You do this by running a Sale by Expression of Interest (EOI) process. 

In an EOI you invite offers based on you sharing all the information that buyers would need to submit their offer, except the price. 

I understand that running an EOI process, and getting buyers to submit an opinion, could sound tough. It’s certainly not a common approach to selling a business.

Buyers, and many owners, instinctively just want to ‘cut to the chase’ by negotiating using the Sticker Price as the starting point.

I’ve run a lot of them.

While EOI’s aren’t straightforward they are without question the only way to properly test the market, and ensure owners sell for the highest possible value.

If you have more than one potential buyer EOI’s are even more effective.

Because no two buyers are exactly the same, your business will be worth a different amount to each different buyer. And this is usually reflected in the different financial offers EOI”s typically draw out.

Standard valuations just don’t account for this, they assume all buyers are the same. 

An EOI is the only way you will ever find out what these different buyers are prepared to pay – pretty powerful!

The key to an effective EOI that results in you selling to the buyer who is prepared to pay the most is simple;

1. More time to prepare, and 
2. Better and earlier advice on potential value, how to run the EOI and identification of potential buyers. 

With more time and better advice you can roll out a  structured process to get the highest possible value for your business.

How to use a valuation to help you sell your business for more.

So how much is your small business worth? 

Having read this article I’m hoping you agree that there can be plenty of opinions on this. 

There is a better question though.

How do I make sure I sell my business for the highest possible amount when I sell?

To achieve this you need to avoid the traditional approach to valuing and selling. 

Because most business buyers fancy themselves as negotiators posting a Sticker Price, when selling, is like red rag to a bull. It reverts to a really basic negotiation where the end sale price ends up well south of the Sticker Price, irrespective of what the buyer really thinks its worth to them. This is good for buyers but bad for you.

If you want to sell and walk away from your business sale confident you have sold to the buyer who has paid the most they would have paid then you need a few things

1. Start your sale planning years ahead of when you ideally want to sell,
2. Get a professional, independent valuation done at the beginning of your sale planning so you have time to make changes that increase value and sellability, and
3. Don’t use a Sticker Price as the centrepiece of your business sale strategy, sell your business using a Sale by Expression of Interest process.  
4. Get advice on how to successfully run a Sale by Expression of Interest process that;
   1. Pinpoints the buyers who will pay the most for your business, and
   2. Provides them with all the information they need to submit their opinion of value.
5. Allocate enough time and marketing & promotional budget for the Sale by Expression of Interest process to uncover all potential buyers.

If you want to discuss how to better plan the sale of your business then please book a no-obligation 30 minute call via the link below, or contact me directly via https://www.kerrcapital.com.au/contact-us