Establishing Value Before Going to Market

February 1st, 2017

All too often an owner decides he or she is ready to sell the business, but doesn’t know how much it’s truly worth. Failing to establish value from the start may result in the disappointing and uncomfortable situation of terminating your advisor because he or she couldn’t get you the value you wanted (or he or she promised) for the business.

The process of selling your business can be very stressful, and may even become a huge distraction for you and your management team. We don’t recommend going through this process unless you’re relatively comfortable with the value you can receive from the sale of your business. As such, it’s important that you and your advisor are on the same page when it comes to the value. Your advisor should recommend one of two approaches to you in order to provide guidance on value before moving forward with selling your business: formal business valuation and market value advisory assessment. If he or she doesn’t, then you may want to reconsider your selection of an advisor.

Valuation Discussion Approaches:

  1. Formal business valuations are in-depth analyses of a company that are usually performed by a certified public accountant, certified valuation analyst, or some other valuation-accredited individual, and must follow strict fair market valuation guidelines in accordance with the IRS.
  2. Market value advisory assessments can be similar to a formal business valuations in the way that they provide a valuation range, but they aren’t usually as in-depth as formal business valuations, the information is meant for internal discussion purposes only, and isn’t an official document.

While formal business valuations are the more costly of the two options, they also tend to be more revealing since they’re official documents. If you have a more complex business structure with multiple segments under the umbrella of a holding company, then it may be best to go with a formal business valuation. Alternatively, if you have a fairly straight forward business structure and only want to understand value, then a market value advisory assessment may be sufficient, but, once again, this is not an official document.

Before anyone starts thinking that this is just an added fee for an advisor, we recommend you consider the fact that the information gained from this process will likely be used in the development of your company’s transaction materials. In fact, your advisor may even offer to offset some of the initial costs associated with starting the transaction process since they have already started analyzing your business through one of the two aforementioned valuation discussion approaches. Therefore, a smaller upfront investment to determine an official and thorough value could actually save you a lot of time, money, and overall anxiety.

If you’re interested in speaking confidentially with a member of our team about valuing and/or selling your business, just send us an email at hq@kaulkin.com.

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