Conducting a private company valuation when seeking to sell the business is not a simple process. In this article, you’ll have the opportunity to explore all the reasons to obtain and use a private company valuation. Selling a business is one of the most advantageous situations to utilize a private company valuation. It is a vital step in an owner obtaining a fair price for their business.
The business valuation experts consider every aspect of a business in detail and analyze its market worth and value compared to other potential investment opportunities.
When a business owner takes on this process, they will often miss or exclude some of their most important assets or high-value factors. Your business may have highly-valuable intellectual property, an exceptionally talented management team, or assets that don’t appear on annual financial documents. Experts go looking for these value-driving factors and ensure that they’re accurately represented in a valuation report.
Gain Support from Business Valuation Experts
It should always be an expert that conducts a business valuation. Not only do these valuations for private companies require extensive, and not frequently used, accounting formulas and knowledge of the market. A qualified and credentialed professional would have an intimate working knowledge of the current and probable future state of the market and how it can affect selling your business.
Valuation experts have the unique ability to conduct a private company valuation without bias. Typically, a potential buyer will bring in an accountant or other professional to breakdown the valuation or contest the proposed sale price. An owner of a private company should have a defensible valuation that can withstand those attacks.
Experts can also present the market worth analysis and present that as a benchmark compared to other potential investments. Through a private company valuation, an owner can show that their business is the better, safe, or more profitable investment opportunity. Then they can use that to attract ideal buyers and improve negotiations during the sale of their business.
There is also the matter of rate of return, risk, and economic conditions. The support that a business owner should obtain from a private company valuation includes access to their knowledge and unique skill set. These experts work with expected rates of returns and risks across a variety of different industries, business sizes, and other factors that impact returns and risk. Most business owners do not monitor or work within the market closely enough to handle this valuation element.
When evaluating the business value, an expert will give fair weight to economic conditions, buyer activity, and the current demand for acquisitions. Economic conditions have historically shown that mergers and acquisitions often put the seller in a compromised position. Without a proper valuation and reasonable or calculated assessment of economic conditions and demand, the owner may sell for much less than what their business is worth.
Adapt Your Mindset for a Business Sale
Many owners sell because they are retiring, no longer wish to run the business, or don’t have the resources to keep the company running. The mindset attached to these reasons often pushes owners to sell the company for less than it’s worth. Through a private company valuation, you can gain a more realistic understanding of your position as a seller.
As the owner, you have invested time, energy, effort, and money into your business. Selling your business is when you should receive the return for those investments. You deserve the best price possible.
To obtain the best price possible, you will need a complete and defensible private company valuation. These valuations can help you in the months or years leading up to a sale as well. For example, if you receive a valuation report that doesn’t hit the figure you’re hoping to achieve through a sale then you can use that information to boost value. With the support of a business valuation expert, you can take actionable steps from the valuation report or move forward into the market with a strong stance on your company’s value.
The Market Approach Valuation
When calculating a Market Approach Valuation, the valuation expert will consider more than just profits. This type of valuation approach includes reviewing the business’s resources, competition, assets, industry position or strength, branding, processes, physical assets, intellectual property, and more. Although this valuation approach will begin with your standard annual financial documents, the research and adjustments go far beyond what you showcase on your balance sheet.
The Market Approach Valuation will provide a fair indication of where your business stands compared to similar companies in your market. Anyone looking to sell or buy a business seriously needs to consider obtaining an accurate and defensible business valuation.
When you’re selling a business, the valuation consultant will present and convey how to evaluate your business for sale. They will help you create a reliable and defensible private company valuation that will serve to achieve a fair market price for the business. Likewise, when you’re acquiring a business, the business valuation serves a similar purpose. The buyer can ensure that they’re not overpaying for a company or that the business’s price also represents issues or concerns associated with risk.
Utilizing a Private Company Valuation in a Business Sale
The primary consideration of the seller is to gather the proper details regarding the business financials and company assets. Ideally, a private company valuation will represent the actual market value of the business. It should deliver a detailed picture of the quality of the processes in place and verify that it meets the necessary standards.
An owner has many good reasons to utilize a private company valuation report, but so does a buyer. Even the purpose of a buyer relying on a formal valuation will ultimately serve the seller if the valuation is fair and accurate.
As a seller, you have the opportunity to use a valuation to identify where your company stands in your industry and to strengthen your business. It also provides you with a stronger negotiating position to defend your ideal selling price. When working with a valuation expert, you may establish multiple price points that are reasonable and still strive to obtain your ideal price.
Ultimately, the valuation gives the owner the information for identifying profit centers, loss centers, focusing the business’s streamline, and determining if it’s a good time to sell. Owners may receive a business valuation report then spend the next two or three years, improving its value and correcting internal weaknesses that lowered the business’s value.
The Buyers Point of View
From the buyer’s perspective, anyone looking to acquire a business should consider multiple investment options. A buyer should not merely look at one investment opportunity, and that means that sellers must make their business ideal for the right kind of buyer. A buyer should look through investment options on the market that fits their criteria, goals, skillset, and offers value. The best way to showcase and test these factors is to put the private company through a comprehensive valuation. A Market approach Valuation will support all parties involved. It will allow buyers to conduct a comparative analysis and determine the best option that yields the highest return.
Many companies are on the market because they are not performing well. Some sellers will work to cover up specific problems or negatives about the underperforming business. Buyers may request a formal valuation to ensure that they have all the information they need to make an informed decision about purchasing the business.
Why is this important to a seller? A private company valuation will often expose unknown elements of operational and financial management. The buyer should have a complete picture of what they’re getting when they invest or buy the business. However, a seller should know all the factors affecting the sale. From the buyer’s stance, it may seem as though the seller was not disclosing information, when in truth, the seller may not have known about some negative impacting factors. The use of a Market Approach Valuation can serve all parties involved in the sale of a private company.
Securing Your Private Company Valuation Before Listing Your Business
Evaluating a business for sales and planning with the support of a business valuation expert should provide useful information to everyone involved. A valuation expert may not always use the Market Approach Valuation method. Many people may choose to use smaller reports to boost the value or mitigate risk in the years leading up to selling the business.
You can obtain a clearer picture of the strengths and weaknesses of your business by obtaining a private company valuation report. This report will help you strategize your approaches, capitalize on strengths, and correct any weaknesses.
Before purchasing or selling a business, the person must assess what they hope to obtain through the transactions. In the business valuation report, you can showcase or evaluate the working business model and explore the company’s incorporated principles. It’s possible that buyers can use the report to identify how they will improve the existing business model. At the same time, sellers can defend their processes and use the valuation to represent the value of their staff.
Business valuations don’t simply define the value of the company but instead enable all parties to identify strengths, weaknesses, opportunities, and more. Contact American Fortune now to start discussing your private company valuation today. Our experts are happy to assist you!
Market Valuation Approach For Mergers and Acquisitions, Buyouts, Business Acquisition, IRS, Exit Planning
Brian S. Mazar, MBA, CBI