Consider this scenario: A traveler wakes up in a foreign place with three things—the clothes on their back, a map in a language they can’t interpret, and 10 coins. As they begin walking down what they think is a path, a person approaches and says, “I can help you read this map and find where you’re going in exchange for one coin.”
The traveler laughs, saying, “You want how much? That’s preposterous,” and continues down the path. As hunger and thirst set in, the path ends at an impassable ocean. The only option the traveler has is to turn back, but the traveler isn’t sure they have the strength to return and start over.
This situation is similar to a common scenario business owners face when they balk at the cost of getting an accurate and professional valuation of their businesses.
What determining business value costs
Generally, a professional business valuation can cost between a few thousand dollars and $20,000 or more. While that may seem like a lot of money, in the grand scheme of things, this can be a small investment toward future success.
Determining business value doesn’t rely on a gut feeling. The process requires understanding many variable elements about your business, the context your business exists in, and whether the business can function without you.
A professional valuation can clarify these elements by showing you why your business has the value it does. It will consider elements such as the strength of management, profitability, the clarity of processes, and the scalability of operations, among other internal elements. External elements will also be taken into consideration, such as where the business is located, the state of the industry the business operates in, and whether buyers are interested in the kind of company you run.
And yet, many business owners predict what their businesses are worth without considering these elements.
What you get for the money
A professional valuation goes beyond simply providing a number to explain why your business is worth what it’s worth, which can create a clearer path for your future success.
The process that professional valuators use can provide clues about where your business’ strengths lie and how to leverage them, as well as how to overcome your business’ weaknesses. Once you know where you are, it becomes much easier to determine where you need to go.
Professional valuations are much more objective and evidence-based than guesses, gut feelings, and wishful thinking.
What inaccurate valuations could cost
The problem with business owners trying to determine business value on their own is multifaceted. But the biggest obstacle that self-valuation produces is setting you off course so early in the process that it’s hard to get back on track.
For example, it may be tempting to say, “My business has produced $3 million of profit over the past several years, so it’s probably worth around $3 million dollars.” So, you begin creating a plan around that assumption.
However, profitability may be a direct function of you running the business. In that case, you leaving the business could have a negative effect on profitability, which will then affect business value. If you didn’t consider this element (and experience shows that this is a common blind spot for owners), it could send you so far off course that you need to completely change your plan.
In addition to the functional challenges of determining business value on your own, there’s also the significant factor of bias. You likely have an emotional investment in your business, which can cloud your judgment. Business owners commonly overvalue their businesses simply because they are too close to see the situation objectively.
Increasing business value can also require change, which can be difficult for owners to accept if their business has been seemingly humming along well for years. Fortunately, professional valuations tend to be more descriptive than prescriptive. This means there may be several different ways to use the information to reach your goals. The key is having the right kind of accurate information to strengthen the business and pursue a path productively toward your eventual exit goals.
Cost vs. value
The upfront cost of a professional valuation may seem high. But the long-term value of a professional valuation is providing clearer guidance for exiting your business on your terms to enjoy the lifestyle you’ve envisioned.
We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional. Please feel free to contact us at your convenience.
Imagine a world where your financial advisor, attorney, accountant, insurance specialist, and property/casualty advisor all worked together, like a board of directors on your behalf. This is the type of Collaborative Advisory Team approach we take in our practice. For many driven entrepreneurs, executives, and high-net-worth individuals, a Collaborative Advisory Team of professionals is the most effective and efficient way to achieve your optimal financial world. At Moneta, we’re reinventing the way you experience wealth management.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
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Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.
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