Does a business owner really know his business’ value?

Does a business owner really know his business’ value?

When a business owner thinks about his future, retirement or succession and that he is planning on selling, he must know the value of his business to determine the asking price according to the fair market value. However, there is a distinction between knowing its business and knowing the value of it. In my experience, 90% of the time the business owner selling his enterprise is experiencing this type of transaction for the first time. This is a big step. My years of experience have allowed me to support people in several transactions. Here are some things that allow me to say that such a transaction is easier to complete with the help of a professional.

Valuating a business yourself

The business and its history

Very often, when determining the value of his business, the business owner considers his future financial needs and his attachment to his business. Over the years, a lot of time and effort were spent to build the business and make it reach its full potential. “Sweat equity” is another factor that influences the owner when he estimates the business’ value. Indeed, there is a distinction between reasonable compensation that the entrepreneur should receive (the value of his efforts) and the true value of the business.

The affection and devotion for the business may often bias the results of a business valuation performed by its owner. Often, he will try to receive a reasonable compensation for his efforts to build the business. Since the sale is generally made in order to retire or to do something else, the entrepreneur often has an idea of the amount he wishes to receive. He won’t let go “his baby” for less than what he thinks he deserves for it.

Mistakes

Have you ever tried to diagnose yourself for a medical condition by searching for your symptoms on the Internet? If so, you know that it is often way worse than it actually is. Well, the phenomenon is the same for entrepreneurs trying to get to know their business’ value. Internet research or hearsay may lead the entrepreneur to rely on a person without the necessary expertise:

Calling a CBV

“Oh, you want to sell your business! I heard that the business’ value at the time of the sale is five times the amount of profits. »

Profits before or after income taxes? Are they real profits of the business or recorded profits? In any field or in a particular one? Is it valid currently for a typical business, or was it ten years ago? Does it give the value of the goodwill or equity value?

In conclusion, if he relies on hearsay and assumptions from an inexperienced person, the owner may be very surprised when receiving the first purchase offers.

In fact, determining the business’ value is a complex exercise. To determine a fair market value many factors must be taken into consideration. There are several subtleties and nuances that are not necessarily taken into consideration by someone with a lack of experience in this field.

Does an owner really know his business’ value?

It is not wrong to say that a business owner knows his business better than anyone else since he is the one who built it. However, it doesn’t mean that he knows its monetary value. When an owner tries to estimate the value of his business, he is often influenced by his affection for it or needs. A Chartered Business Valuator will take the time to analyze all the components of the business. Dealing with a professional to determine the sale price gives you the ability to justify it. When the buyer makes his offer, he’ll know what the business is actually worth. This way, there is no surprise on the seller’s or the buyer’s side.

If you are selling your business or you want to know its value, please contact me. I would be happy to assist you and allow you to confidently conclude this important transaction.