Some Reasons to Value a Business

A Field Guide to Business Valuation is available now, and it is an ideal first book for people who want to learn how to perform valuations themselves but have limited or no experience in the field. The authors have distilled their extensive experiences into a succinct and cohesive guide to help business owners estimate, preserve, and increase their business’s value. The following is an excerpt from Chapter 3: Reasons for a Business Valuation.

A banner hanging on the wall of a particular consulting firm states “In God we trust—everyone else, bring data.” The message of this sign is humorous and clear: If one wants people to agree with one’s position, one must provide supporting data. This is particularly true when making major decisions.

Some of the most important decisions business owners will make are related to the transition of ownership in their business. Yet, when they come to the table for these big decisions, people sometimes forget to bring the most important thing: data. At a minimum, they need data about the value of their business. It would also be beneficial to understand their business’s value drivers, risk profile, profitability drivers, performance relative to their peers, and other items. A thorough business valuation contains this information and more. Below are examples of some of the business valuations we were working on at the time of this writing and how our clients used the data we provided. (We changed the names and some minor details in these examples to preserve client confidentiality).

Example 1: Jeff, the owner of an engineering firm, would like to step away from his business in the next five years. He has two exit options in front of him: selling to a key employee or selling to a competitor. Jeff has heard from engineering colleagues that larger engineering firms have recently been buying up smaller practices like his, often paying a premium to acquire firms that round out their offered suite of services. He also knows that a competitor will be able to afford a higher price for his business than his key employee.

His goal is to generate $5 million from the sale of his firm. As long as he can generate this baseline value, he would prefer to sell to his key employee as a reward for his or her hard work over the years. This employee would also maintain the culture Jeff has established, providing stability to the rest of the team that may be lacking if an outside party acquired the firm.

We are helping Jeff understand what the fair market value of his firm is and how much of a premium he could expect if he sold his company to a competitor. Using these data, Jeff can determine whether selling to his key employee meets his goals or whether he should consider selling to an outside party. We will also provide Jeff with a risk assessment and analysis of strengths and weaknesses. This will allow Jeff to “tidy things up” over the next five years and position his firm for transition and sale.

Buying or selling a company is just one of the many reasons for needing a business valuation, and there are six more to learn in this chapter alone! Get your copy and make sure you have the tools to get started on the valuation of your business! You can learn more about A Field Guide to Business Valuation here.