Not Ready Yet?  Think Again!

The most effective process for selling a business begins with putting an independent, fair market business valuation in place.  We often get apprehension from potential sellers that doing a business valuation “now” is premature.  Many say that it’s not necessary because they don’t intend to sell for a couple of years, and nearly all say that it’s best to wait until their sales and profitability get even higher in order to obtain the best sale price. From our standpoint, though, an early valuation could still prove beneficial, and in a variety of ways.

Firstly, a business valuation provides a professionally-executed, documented assessment of the company’s value now.  It will include the value metrics the valuation firm sees as appropriate – like the risk-adjusted discount rate on the company’s cash flow as well as the various multipliers (of revenue, seller’s discretionary cash flow, and adjusted EBITDA) the valuation firm is seeing in reported sales transactions in the company’s industry.  We’ve used these metrics to help a client establish various “what if?” scenarios based on expected future business results, so getting a business valuation sooner rather than later could provide a framework for assessing the effect of potential future actions on likely fair market value.

The valuation also comes with a “marketability assessment” that takes a look at what additional personnel, financial, and operational changes could do to increase the attractiveness of the company to a prospective buyer.  In other words, getting a valuation done now provides several sets of “eyes” looking at the business from an objective standpoint.  If there are deficiencies beyond those already known by the seller, he or she will have time to remedy them.

Secondly, the result might be surprising.  If the seller is looking for a particular selling price, the valuation would provide information regarding how close he or she is to that target price.  I’ve had (admittedly, only a few) clients that were actually surprised at how close the valuation was to their desired price.  So if a prospective buyer comes along before the target sale date, you’ll still be able to have a meaningful conversation that could lead to an offer premium.

If the seller has initiated a major improvement plan that promises to deliver significant increases in revenue and cash flow, the impact of these future plans won’t be a part of the valuation.  But the seller can still take advantage of expected future results through earn-outs based on these future performance improvements coming to fruition.

Thirdly, we haven’t had a recession since 2008, and while the economy looks fine despite some international trade tensions, this expansion has been long by historical standards.  What if the economy stumbles?  What if industry or competitive factors frustrate the realization of planned performance improvements?  I would suspect that it would be prudent to have a plan to sell early if conditions warrant.

Finally, it really doesn’t cost anything to do a valuation now.  Yes, there is an upfront fee, which covers the cost of the valuation firm that performs the assessment.  (Valuations are not taken seriously by buyers if they’re done for free or by someone who isn’t independent of the seller.)  However, the seller can get a nearly-free update within 2 years of the date of the valuation report, so he or she would have the best of both worlds – a defensible value now and a pre-paid valuation closer to the desired sale date.  And ultimately, if the seller chooses A Neumann & Associates to be the selling agent in the transaction, we refund the entire cost of any valuation(s) performed at closing.

In our experience, there is almost no upside – and lots of downside – to waiting for the “perfect” time to perform a business valuation.  There is no such perfect time, but we’ve seen plenty of cases where the seller wishes he or she had performed the valuation much earlier.  In other words, there’s no time like the present!