Learning to look at your business through the eyes of a business valuator can give you a clearer idea of how much it is worth.
Every business owner wants to know what their business is worth, so how do people calculate it? Very frequently business owners say their business is worth X and then someone else comes in and says they don’t agree. So lets talk about the basics of valuation that business owners need to understand.
To me, valuation is a very cool thing. We talk about dashboards. We talk about getting the pulse on our business, and I think one of the most important things we can do is really understand how our business is sitting. And since valuation really is the ultimate business dashboard – and it incorporates every facet of the business – it really makes sense that business owners understand that.
There are a lot of different values; Rob Slee and his book Private Capital Markets talks about 20 different levels of value. So, when you talk about value, you need to get really specific about what you are talking about.
There are three levels of value I want to talk about, and the first is fair market value. Fair market value is the value an appraiser would put on your business for legal reasons or IRS reasons.
The value that most of us think about as business owners is investment or strategic value. That’s the value a buyer would write a check for or structure a deal for your company on.
And there’s really a third value called dynamic transaction value, when you have a business that’s very desired and you have multiple companies bidding for your business.
But in terms of how businesses think about it, one of the things to remember is value is analyzed. Price is negotiated.
To me, that’s a critical distinction. In other words, business owners need to understand you can do all the analysis in the world and come up with something that seems to make sense, but the real acid test is what the business is going to sell for in the market, and those are two very different things.
The two key drivers of business value are something that owners have a general sense of.
Value is the benefit of the business divided by the risk of the business.
It’s very simplistic to say that, but when you get into businesses which are very complicated, trying to apply that concept becomes complicated. That’s what the world of business valuation is all about, qualifying those two things: benefit divided by risk.
I would encourage business owners to start thinking of those things in quantitative ways.
Obviously, every CEO is looking at financial statements and revenue, but one of the things they tend to downplay or not focus on or quantify is the whole area of business risk.
The other basic of business valuation that owners need to understand is recasting financial statements.
When a valuator takes the financial statements of the business, they don’t just start applying all the methodologies and body of knowledge of valuation to the financials the way they stand. They recast them.
In other words, they turn them into something that represents the business on an ongoing basis. And it’s something that I think business owners can really learn from.
Here’s a simple example. Owner’s compensation can have a gigantic impact on value. If you are the CEO of a company and you’re taking a salary of a half million dollars, but replacing you with somebody in the market would only cost $200,000, then really $300,000 more falls to the bottom line.
If you’re talking about a multiple of five, you just added a million and a half dollars of value to the business.
So in looking at financial statements, it’s critical to go through them with a valuator’s perspective.
A valuator will not look at your business the way a business owner sees it, and that’s part of the benefit people can get by putting on the lenses of a business valuator.
For twenty-five years, Marian Cook has been a trusted advisor to the hundreds of owners and executives worldwide whom she has helped to improve business performance and value. She has worked globally with firms ranging in size from start-ups to Fortune 500 companies. She has helped them develop and execute their strategies, realize their goals, and maximize their businesses’ valuations and their transitions to new ownership.