“I’ll get around to it one of these days…” Does this sound familiar? Getting a valuation of your privately-owned business has likely crossed your mind with recognition that it’s a smart move. If this imperative task has slipped to the bottom of your to-do list, it’s a good time to re-prioritize. Below are six compelling arguments for having a business valuation performed as soon as possible.
- It’s smart to capture a photogenic moment.
Like a snapshot, a valuation is a measure of a business’s worth at a particular time. The economy has improved recently and hopefully the outlook for your business and its bottom line have followed suit. Healthy profitability, as well as solid cash flow to owners, lead to higher values for privately held businesses. Have your business valued now, while the economic outlook is positive, and you’ll be happy with the way it positions you to future buyers.
- Mergers and acquisition activity is heating up.
The economic improvement has helped spur more mergers and acquisition activity in the U.S. The large deals get the most print and reaction from the media, but there are more sales of middle market businesses ($5 million to $500 million in revenue) in the U.S. than of large businesses. Middle market businesses can be attractive to other middle market businesses looking to grow, as well as large businesses looking to gain additional market share on their quest for total domination. As a potential seller, you could have multiple buyers pushing up the value of your business. A business valuation helps prepare you for the event of an offer from an interested buyer. It puts power in your hands to evaluate whether or not their initial bid is serious.
- Interest rates are still low.
As the U.S. economy has recovered, the Federal Reserve has decided to keep interest rates at historically low levels. You know that the low borrowing helps finance deals for privately-owned businesses such as yours. It’s a contributing factor to the increase in M&A activity noted above. Since most buyers will likely finance at least a portion of a purchase, these rates help move them to the table.
You may not realize that low interest rates offer you another advantage: when used in financing a potential deal, they will generally lead to a higher multiple for the value of your business. Nobody expects these interest rates to last forever, so it’s a good idea to act now, while rates are low, to determine the value of your business.
- The aging population portends a future shift in the market.
According to information from the Urban Institute, the number of Americans age 65 and older will more than double over the next 40 years, reaching 80 million by 2040. This aging population base will include many business owners with the desire to transition ownership in their privately-held business. That’s going to put more and more potential sellers in the market, shifting power to the buyers. Having your valuation completed now means you’ll be prepared to act quickly when, and if, you sense an impending change in market conditions that prompts you to seek a buyer.
- A valuation is your key to a healthy succession plan.
You may be one of the many business owners who have delayed discussing what will happen to the business when you are gone. Succession planning is a gift you offer your loved ones and your workforce. But it’s a difficult conversation to initiate, even though you understand its importance. A business valuation can offer you an avenue to broach the subject. Find out what your business is worth; then gather the right people around the table to plan for the future of this asset. With hard numbers to discuss, the meeting can be productive, rather than theoretical.
- The number you have in mind is probably wrong.
We all take stabs at assigning values to just about everything in life, whether we are conscious of it or not. You may have done your own market multiples analysis of your business, based on industry rules of thumb or other modeling methods. Or you may be hazarding an educated guess.
Your attempts at an unbiased estimate might lead you to business sales multiples based on transactions that are not exactly comparable to your business, or are too old to be valid. Using those old industry multiples from a book on your shelf just might structure a sale to a very happy buyer. You wouldn’t want to leave money on the table, so make sure you have the right value.
A professional business valuation is undertaken by specialists who are credentialed by organizations such as the American Institute of Certified Public Accountants (AICPA) and the National Association of Certified Valuators and Analysts (NACVA), and have received valuation designations such as Accredited in Business Valuation (ABV) and Certified Valuation Analyst (CVA). They will evaluate all comparable transactions to find the multiple for business transactions similar to businesses like yours, in the current market.
Selling your business may not be your goal today. But that doesn’t mean you should put off your business valuation. Knowing your business’ worth tells you where you stand, and it gives you options. It just may give you the upper hand in any business transaction the future holds.
Further resources for understanding reverse due diligence:
- The fundamentals of reverse due diligence: a lite paper
- What is a quality of earnings (Q of E) analysis?
- How to conduct Q of E – your questions answered