What is my business really worth? Lets find out…
We’ve all heard the question ‘How long is a piece of string?’. Ignoring the answer that it’s twice as long as half its length, what does string length have to do with the value of your business?
Well, the length of this said piece of string can vary significantly, and your business valuation can do so too.
But that’s not very helpful and not the answer you were looking for. You want to know if it’s £1m or £5m or £50m. Or somewhere in between. You want to know if you can retire on the proceeds or live like a King on them.
Let’s look at why the ‘value’ of your business varies.
Valuation 1 – Accountants
Accountants frequently value businesses. They might seem to be the ideal people to value your business because they deal in financial matters. However, your business is about more than numbers; it’s about your reputation, your contracts with clients, your staff, your IP, your business relationships and so much more. All of this has a value that stretches far beyond your financial performance.
Valuation 2 – A Direct Buyer or Competitor Buyer
If you’ve been approached by a potential buyer, they may well see a value in your business that others can’t. But, and it’s a very important ‘but’, they don’t want to pay you full value for your business. They want to buy it from you for the best possible price before anyone else realises that you may sell and puts in a better offer. And who can blame them? Their offer will be low and almost definitely well below the actual market value achievable if there were competing buyers.
Valuation 3 – A strategic buyer
More positively, a strategic buyer will often see greater value in your business than many others. Such buyers can see that buying your business will allow them to sell their products or services to your customer base and vice versa. Both businesses benefit and grow quickly. There may be cost and efficiency savings too, to further boost profits. All this adds up to an improved business valuation but bear in mind, despite this, such buyers will still be aiming to value your business as low as they can.
Valuation 4 – An Informed Buyer
Often buyers don’t see the value in a business because every business is multi-faceted and complex to understand thoroughly. However, when buyers interest is the result of skilled and experienced marketing by a business sales specialist, this understanding can considerably improve the value placed on your business by such buyers. Remember, selling a business is a unique selling activity, not to be confused or dealt with in the same way as product or service selling activity.
Valuation 5 – Investors
Private or corporate investors may have other businesses in their portfolio which could provide a strategic reason to buy but remember, investors are looking for maximum ROI and the best way to begin is with the lowest cost purchase of your business.
Valuation 6 – A Business Sale Company
It makes perfect sense that if you want to sell your business, you should seek skilled and experienced help from a specialist business sale company, like Avondale. But even then, business valuations from such companies can vary.
This is probably the most challenging issue of the all valuations. Why do even business sale specialists not agree on the value of your business? The reasons are varied but include:
- Experience in the sector – Companies with a great deal of experience in your sector know the values that similar companies like yours have achieved and so are able to provide valuations more accurately than others.
- Buyer database – Some business sale specialists have buyers on their databases who are looking for companies like yours and have specified budgets. They have a good idea what they can achieve for your business.
- Failed buyers – If they have sold businesses like yours and in your sector, the chances are that they will have already been in contact with many buyers who failed to successfully purchase a company like yours in the past but are still looking.
- Sales vs. Specialist – a person who directly works with business owners and who has a successful track record will always be able to provide a more realistic business valuation than a salesperson. Always take the opportunity to talk directly to a specialist consultant who will have a greater understanding of your business and its potential value than someone who doesn’t.
The final reason why valuations can vary is based on over optimism. It may sound a little harsh but if one business sale specialist estimates that you will achieve £5m and one estimates you will achieve £4m, which would you choose? In the end your business will sell for whatever someone is willing to pay but you’ll have committed to the specialist who simply gave you the highest number, often irrespective of their actual capabilities. What resources, skills and experience do they have to achieve their estimated value?
So, if and when you choose a business sale specialist, ask yourself one simple question: Would you pay the value suggested for your business if you were a buyer?
Our free technical guides can help you with understanding your own business valuation, specifically “Guide 1: Valuation Methods and Multiple Arbitrage”.
