Do You Know the Real Value of Your Business?

Jul 09, 2018

When business owners say they’ve been approached by buyers, they often say the price mentioned was far too low to take seriously. When I ask them for their estimate of the company’s value, I expect the answer to be high. For these reasons, I like to emphasize the importance of seeking a professional valuation – one that is tied to real market comparisons and the specific strengths and weaknesses of your business.

Another thing that often comes to the surface is “gap shock” or what I identify as the difference between what you feel your business is worth and what a buyer knows it is worth. While gap shock applies primarily to a sale to outsiders, it can just as easily cause problems in negotiations with internal buyers and family successors. There are several elements that can impact the size of the gap, and also a few different forms of gap shock. For example, the gap can vary based on the existence and adherence to a long term strategic plan or who the key players are and whether or not they will stay with the company after you are gone. Another important factor can be the number and diversity of a company’s revenue sources.

There can be an uncomfortable gap between the cash funding of your retirement lifestyle and the cash proceeds generated at the time of sale. Another gap may pertain to what you and your spouse believe your life expectancy will be and what medical science expects it to be – thus raising your retirement income needs. Finally, consider the possible gap between what you think you might have to pay in taxes from a sale and what the IRS knows you will owe.

On a very positive note, Gap shock can serve as a punch list of what needs to be done to not only remove valuation negatives but also enhance productivity and profitability over time – thus growing your potential sales price. When working with a client, I never feel comfortable challenging an owner’s estimate of value because any number is achievable when you have time and are willing to commit to a planning process using the right advisory team.

Posted In: Business Succession

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