Business valuation perception versus reality

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Business valuation

This is one of the most misunderstood areas by small and medium business owners.

Everyone attempts to put their own perspective on what is the right valuation method, what should be included or excluded from the valuation as well as perceived value.

The general rule is that most valuations used, are adopted, because they provide the highest sales value of the business for the seller, yet we have also seen how sometimes the business is still undervalued.

We have seen over the years how e.g., two businesses in the same sector, with different management styles have produced different values. If one business owner is gearing their business, they will have increased liability, and if the other is running a cash tight business, will result in different values of the business.

The biggest fact about a business is that it is one of the biggest investments you will make in your life, yet when it comes to exiting the business for retirement purposes etc very few businesses are reaching this milestone and end up being closed versus providing e.g., retirement income to the owner that has dedicated their life to the business.

There are hundreds of business valuation methodologies out there you just need to do an internet search to realise it. Never mind the other options out there and the list continues, then you end up with the business owner or business broker that adds their own twist to a valuation or tries to benchmark it against some industry standard. The reality there is not enough information available, or should we say a record of business sale history like a deeds office for property where you can get a real indication. Demand for a particular sector, area etc are also factor and will also influence the perception of the valuation.

A broker will always apply the highest figure to a valuation to secure the business with a business owner and a buyer will always use the due diligence process to reduce the value, effectively forcing the seller to either settle for less to do the deal or result in a lose-lose scenario where both parties walk away with no deal.

If google went on sale tomorrow there would be a bidding war for the business, all valuation methodologies would not be applicable, the valuation would be a guideline.

Do you think someone will try and negotiate on price? Or try and push the value of the business down? No because before they blink the business would be sold to the highest bidder. This is where demand vs reality determines the value. Where you have a willing seller and a willing buyer it will always be the intent to realise a win-win scenario that results in a successful deal.

There are two accounting frameworks worldwide the first and original framework is GAAP (Generally accepted accounting principles), and the more relevant / current framework is IFRS (International financial reporting standards) which is currently used in 166 countries (IFRS countries)

The three key areas I refer to, and every accounting organisation uses as per the regulatory frameworks is,

A – Profit and Loss / Income Statement

B – Balance Sheet

C – Cashflow statement

This is where the value of the business sits and this is where we use all three to determine a real market value, plus we assess the current structure of the business and then we compare it to your expectation to set a final value.

Why do we do this, it is simple.

We have seen businesses that might have had the following scenarios.

  1. Strong revenue model but weak balance sheet, maybe more service based than product based, or both,
  2. Strong balance sheet with average revenue,
  3. Strong revenue model and strong balance sheet but cashflow forecast has a different picture.

We focus on the seller’s objective and align it to a well structured and win-win scenario for both the seller and the buyer as the whole objective is to take a going concern and keep it a going concern going forward.

If one of the scenarios apply to you then get in touch so we can make it a win-win scenario for you.

You have tried to sell your business in the past, and it has fallen through, or you are planning to sell your business at some point soon and need to look at a win-win solution.

Unfortunately, if you are currently signed up with a business broker we cannot be of any assistance.

Either way get in touch to discuss your scenario, no obligation.

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