At some time every business owner asks the question “How much is my business worth?” He or she may be trying to gauge the value of their years of sacrifice and hard work, measuring their success or trying to estimate what they could expect, should they decide to retire or pursue other business or personal interests.
As this questioning becomes more serious and focused the owner would typically turn to a trusted professional to understand what is the business worth. There is a high probability that this well meaning professional will relate the value of the business to the historic profitability of the business. This seems reasonable at first glance, and accurate if taken as a simple accounting transaction but is almost guaranteed to seriously undervalue any business. In nearly every case, when a business owner uses this traditional method to calculate the worth of their business it significantly underestimates what can be achieved. In other words, the valuation method is fundamentally flawed.
Traditional methods of taking a business to market focus on past performance and past result. The truth is that nobody ever buys a company’s history; they only ever buy its future. And this future would be under the new management.
Also, these traditional methods will often encourage business owners to go to market with a value attached based on multiples of profit. This is the probably the biggest single reason for a poor outcome and why businesses do not sell.
It is a fact that these traditional methods rarely generate sufficient numbers of potential acquirers. According to research these methods on average will only identify 12 potential purchasers, most of these are unqualified purchasers who are just searching the market and not serious enough to be realistic purchasers.
There are other alternatives than simply speaking with your trusted accountant which can result in generating a real valuation of your business. This valuation can and will be increased if the owner manager actively works with an experienced business advisor to prepare the company to be ‘investor ready’ and ‘exit ready’. This will increase the value he or she can achieve above a simple historical multiple of past performance, and equally important reduce the time to exit and the stress involved as due diligence will be a simpler process.
For more information, have a look at this useful document – So you are thinking about selling If you would like to explore how CMC can support you through your business journey, contact us via this form.