The true worth of valuation when buying or selling a business

Shawn McLernan, Valuation & Corporate Finance Manager with MRSB Group, shares some of the benefits of assessing value during the buying or selling process.

Valuation may seem like an unnecessary step when you are preparing to sell your business. After all, you have your financial statements, bank accounts and tax returns – these will show potential buyers what your business is worth, right? Well, this isn’t completely true. While these items do help, they also miss many things that could raise the value of your business once you put it on the market.

When the time comes to sell your business it is important that you have a clear sense of its true value. Unfortunately, it is fairly common for sellers to look at company profit and little else when determining what their business is worth. In fact, there are many other aspects that can play a part. Do you own your own building? Do you have patents? Is your business located in a great commercial area?  What about your customer list and other intangible assets?

Once you understand how these factors affect the true value of your business you can list it at a reasonable asking price that will meet your profit needs and offer buyers a fully informed sales package. Do not be surprised if potential buyers are interested in an independent valuation in addition to the valuation report you provide. This is simply good business sense, and by providing a valuation report compiled by a professional you are showing potential buyers that you did not randomly select a dollar amount and that you have invested in making sure the value of your business is accurately reflected in the price.  Remember, knowledge is power, so the more information you provide and the more knowledge the purchaser collects, the better the sale will turn out.

From a buyer’s perspective, when you are presented with a comprehensive sales package rather than just a price, you can see all aspects of the business you are thinking about acquiring: profit, loss, value, assets, etc. This helps you make an informed decision before you offer a bid to purchase the business. Without the information provided through the seller, you must do the research on your own – not very fun if you were hoping for a relatively speedy acquisition.  No one wants to purchase a business blindly, or to rely on an incomplete or unsupported valuation presented by the seller.  What would happen if you purchased a business based on the owner’s valuation and asking price, only to find that the estimate was incorrect and that the business is worth much less than you paid? You have taken a loss on investment, and unfortunately can only blame yourself for not being an informed buyer. Help yourself out by asking the right questions early in the process to prevent confusion during the transaction.

Eliciting the help of a valuation professional can be the fastest way of ascertaining either what your own business is worth or making sure the right questions are asked before you acquire someone else’s. A valuation advisor will look at not just your business, but the entire landscape of your industry.  Before you are given any kind of idea about what your business is worth, they will dig in to find every possible component of value. Your profits will be researched and your company will be compared to others in the same industry.

The cost of an independent valuation is minimal when compared to what you stand to lose if you make a poor selling or purchasing decision. You may be leaving money on the table as a seller or overpaying as a buyer.   So before you jump headfirst into the marketplace, think about what your time, money and business are worth to you.

Questions? Contact our Transaction Services team here.