It’s probably not as much as you think
Say you own a business. Maybe you’re thinking of selling. Know what it’s worth?
Are you sure?
Are you sure sure?
“Sixty-five percent of business owners don’t know what their value is,” says Scott Bushkie, president of Cornerstone Business Services in Green Bay. “I think that number is probably even low.”
A number of factors contribute to why business owners don’t often have a solid idea of how much their company is worth – including that they think they have the right information when they actually don’t.
“Most businesses, smaller businesses and mid-market ones, are caught up in the day-to-day issues of growing, putting out fires, working in the business versus on the business,” Bushkie says. “A lot of people have opinions about values and it’s blown out of proportion. I think there’s a lot of bad advice out there, and business owners don’t spend the time or the money to bring in a specialist to give them an accurate picture.”
Some common situations when business owners would need a valuation might include when they’re thinking of selling the business, going through a divorce, planning their estate or even entering litigation with business partners. But it’s a good idea for business owners simply to get a snapshot of where they’re at so they’re not surprised when they get ready to retire, Bushkie says.
“It’s a shame to see someone work 20 or 30 years and come into our office with certain mentalities that are not going to come to fruition,” he says. “They have two choices: Readjust what their lifestyle is going to be, or work a few more years.”
Sometimes business owners will assume because another business had similar customer concentrations and similar margins that it will sell for a similar price, but that’s not accurate because each business is unique, Bushkie says.
For example, two companies may have the same sales, the same profits, the same number of employees, but if just one characteristic is different, the value can vary widely. “Take customer concentration. If you have 100 customers and they’re all 1 percent of the business, or if you have 40 customers and one is 50 percent of the business, that will affect the value or the ultimate sale price,” Bushkie says. “There’s an inherent risk there.”
Business owners also sometimes fail to talk to the experts, instead seeking advice of the people around them, and come up with a valuation on their own.
“What happens in those situations is they’ll talk to their friends and other people in business and somebody will tell them, ‘Your type of business sells for 10 times profit, or one times revenue,’ and that’s typically referred to as a rule of thumb,” says Greg Ksicinski, principal for the Brookfield office of SVA, which also has offices in the Fox Cities. “Those rules of thumb are based on industry averages. The failure there is it does not consider the specifics of your particular business.”
For example, your expenses could be higher or lower than the industry average or you could have specific skills or a unique product – those factors aren’t figured into industry averages, he says.
“It can go the other way, too,” Ksicinski says. “One of the biggest issues is if a business has one customer that accounts for 50 to 60 percent or more of their business, that’s a big risk and that can throw off those industry averages, which is why they need a business valuation specialist.”
Business owners also might think valuation is something that can be done in an hour or that they can look in a book and find out what their valuation is, but that’s not the case either, Ksicinski says. It really takes an expert to consider the multiple components that must be taken into account.
“Valuing businesses is more complex than valuing, for example, your personal residence,” says Barbara Bader, president of Fox Valley CPAs. “Businesses are all so unique.”
Finding the fair market value of businesses includes looking at intangibles – the things you can’t touch but still have value, or the things that make people want to come to your business, Bader says.
People often use the term “blue sky” or “goodwill” to refer to these intangibles, which can include how you do business, your company’s reputation and customer loyalty. It also includes things like customer lists, contracts, copyrights, patents and franchise agreements, she says.
“What a valuation analyst will do is they will look at your operations over the past five years and will determine the value of those intangibles as well as the tangibles,” Bader says. “You can have two people in the same industry whose businesses have significantly different values based on goodwill, which is based on your prior operations, how you ran the company, how you run the company, how you manage the company.”
The economy, of course, has an impact on valuation as well.
“(Business owners) need to consider the state of the industry that they’re in, the general economy, the individual company’s current financial situation both historically and what it’s going to look like in the future,” Ksicinski says. “And you need to consider the specifics of their company structure – are they significant players in their industry? Is everything tied to one individual?”
Being vital to the operation of a company is great for the ego, Bushkie says, but not always great for the valuation. “If you get hit by a truck tomorrow, what’s the company worth? The value goes out the door,” he says.
The cost of getting your business valued varies widely depending on the complexity and depth of the analysis. But pricing your business incorrectly can be extremely costly – say your business is worth $1 million, but your pricing is off by 10 percent – you’ve lost $100,000, Bader says.
The only true way to know what a business is worth, Bushkie says, is to secure offers from a few interested parties. “That’s the only time you’re truly going to know what the true fair market value is – what someone’s willing to write a check for,” Bushkie says.