Real misconception of a business valuation

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Business valuation

Many business owners believe there is flexibility in moving the goal posts of a business valuation. The reality is they are not wearing the correct hat when they attempt to move the goals posts.

Firstly, a business is a separate legal entity in its own right, and the belief that a director has the choice that they can add and take from the business as they want is incorrect. There are legal and tax implications in every decision made on behalf of the legal entity by the director, never mind the solvency implications.

Far to often when reviewing a business valuation and discussing it with the business owners, it never surprises me when sale of a business does not go through. Way too many business owners receive an offer for the business, and then suddenly they believe there is an opportunity to move the goal posts by trying to change the baskets of goods included in the valuation/sale of the business.

Secondly the legal entity owns the assets, liabilities, services, goods etc and not the directors. There are separate tax implications for the directors, as well as the business when disposing of an asset, settling a liability, in fact any transaction relating to the business.

The reality is that not all business owners understand the legal, tax and solvency implications of some of the decisions that are made.

I had a recent scenario where a proposal was made to the business owner for their business, and then suddenly they believed they had the right to change the basket of goods resulting in the goal posts being moved, and the business taking on a totally new value from the original valuation.

The decision they made took a win-win scenario where they would achieve the asking price they wanted (ideal scenario for them), then they came back with the belief they had the power to change the asset structure of the business to create a win-lose scenario in their favour.

The reality and impact of their decision was as follows, the proposed changes they wanted, took the business sale from a win-win scenario to a win-lose scenario, which in the end resulted in a final lose-lose scenario.

Why, because the impact of their decision and the belief they had that they could move the goal post if they decided to go ahead, would result in the business being insolvent and be forced into liquidation. Why would someone pay for an insolvent business? Would you?

It is for this reality that 9 out of 10 business are not sold because there is the misconception that the basket of goods that legally belong in the business valuation, can be modified to suite the personal interest of the director/s.

If you are seeking the ideal win-win scenario then get in touch, or if you need to understand what should be in your business basket of goods and what should not.

If you are thinking about putting your business on the market, we can assist you in this regard.

We will follow with a later article on our valuation process as well as a separate article on why we do not use business brokers, so if you would like to receive updates, subscribe to our newsletter on our website www.raxsonic.com

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