Business valuation and why it’s important. For most business owners, their business is their most valuable asset and it can also be their pension. It often represents their life’s work. It’s important…very important.
The Importance of Business Valuation
I was up in in Luton last year with my son who wanted to buy a car. When we were asking about the price, the car salesman said, “This car owes me £15,000.”
…I’ll come back to that later.
Let’s talk about business valuation and why it’s important.
For most business owners, their business is their most valuable asset and it’s can also be their pension. It often represents their life’s work. It’s important…very important.
It’s worth remembering that every business owner leaves their business one day. This could be through a planned exit, a forced exit or something more tragic like poor health or even death.
With all this in mind, it is probably worth taking control of the value of your business and taking positive decisions on what your choices are for the future.
Often the best thing to do is to sell the business. This may be a sale to an industry player, a strategic purchaser, a financial purchaser or perhaps to the existing management….it could even be to the next generation of the family.
And there are many ways to approach these sales and to structure the deal.
Maximising value, leaving a legacy, providing a pension, minimising tax liabilities are all things to be considered.
The start point for any business exit has to be you knowing the value of your business. Let’s be clear, you’re not going to allow the purchaser to solely decide what your business is worth, are you?
Our experience has thrown up some interesting things around how owners value their business. Valuations can be plucked from the air. A valuation can be based on what a friend sold their business for. It can be based on multiples that others have bragged about achieving.
I recommend that you get a valuation of your business now, whatever your situation. And the point here is that the valuation of business must be considered through the lens of the purchaser…what are they buying?
Let’s flip back to Luton and that car that owned the seller £15,000. Yippee, he knows what it has cost him. But what’s that got to do with me? He may have overpaid for it. The value of the car to me is how I see it. How could I spend or invest my money elsewhere? It turns out his car was overpriced.
And the point here is that the time and money you’ve invested in your business doesn’t directly correlate to the value, if at all.
This reminds me of another business I was talking to a while ago. They were essentially a computer software business. Initially, their calculation of the value of their business was around the time and materials used to create their platform. They added to this the reduced salaries the owners were drawing from the business in the early stages, as they felt they were owed this money. Bingo…a valuation.
The reality was somewhat different. And in this case, the business was worth substantially more to a strategic buyer. Our website has a free business valuation tool. Have a look at it.
And if you would like to know more about how we can work with you to maximise the value of your life’s work, get in touch with us for a chat or visit our website at succession.plus.
Don’t overvalue your product like the car salesman. And don’t undervalue your business like the software company did.
See this post about business exit and succession planning.
Leave a Reply