What's It Worth?

By Jennifer S. Hendrickson

Any business person that has ever considered buying or selling a business (even part of a business) is faced with a simple question:  what is it worth?  The simple answer is whatever someone is willing to pay for it.  The challenge is to figure out what that number is and it may be surprising to learn how subjective the process of valuing a business can be.

When we buy shares in a publicly-held company that is traded on an exchange, we see fluctuations in value but we make buy/sell decisions based on intrinsic and personal comfort factors.  When it comes to pin-pointing a value in a privately-held company (or a publicly held company that is thinly traded), many don't know where to begin. 

The solution is to hire a professional firm with experience in performing valuations.  This distinction is important as some small business owners ask their tax accountant for advice and end up with a value that is unsubstantiated based on a rule-of-thumb method that is far from accurate.  To be fair, some accountants are well-versed in valuation techniques, but this is generally the exception rather than the rule and you should always ask about their experience in this niche area.  There are three parts to a proper valuation:

1.  Economic Conditions:  description of national, regional and local economic conditions existing as of the valuation date, all of which are taken into consideration.  This is similar to real estate - sometimes it's a buyers market and other times it's a sellers market.

2.  Financial Analysis:  financial analysis comparing time periods and appropriate ratios.  Industry and competitor data will also be used if it is available.  This helps determine the discount rate and/or market multiples. 

3.  Calculations:  depending on the type of business, the valuation expert might use the income approach, the asset-based approach and/or the market approach.  There are multiple models available within each approach and the valuation should show calculations for at least three that are most appropriate for the type of business.  This allows the valuation expert to get "in the ballpark" and begin making adjustments and allowances.

There are many places to find a professional firm to perform a valuation and the fees for doing so vary widely.  You can submit your financials, tax returns and other documentation to an online business, but the one-on-one collaboration may be missing.  There are also brick-and-mortar firms (like Hendrickson Business Advisors) that provide these services locally, regionally and nationally which may suit a business owner better.  When you're unsure where to turn, it is a good idea to start looking locally for such a firm or talk with your local Chamber of Commerce about options available.

It is NEVER appropriate for a valuation expert to charge a percent of the value as his/her fee for service.  Because a percentage arrangement may cause the value to be artificially inflated; a flat fee negotiated in advance is the only appropriate method of commissioning this type of work.

To be certain, if you hire three different companies to perform valuations on a business, you will get three different answers.  For this reason, it is important that a buyer and seller each have independent appraisals performed using the same information.  We have seen some groups that simply split the difference between the two valuations if they are close in proximity; other times they will jointly seek a third opinion to make both sides more comfortable with the end result.

Personally, I have been performing business valuations for years.  My education and experience in buying and selling companies has prepared me to handle most industries and I would be glad to talk with you about yours when you have a need.   If you are interested in learning more, contact us today.