Taking The Guesswork Out Of Business Valuation

Taking The Guesswork Out Of Business Valuation

The poet and playwright, Oscar Wilde, once described a cynic as someone who knew the price of everything and the value of nothing.

A good friend of mine has sold residential real estate for years.  Describing some of her non-cynical clients, she tells many stories of long-time homeowners who struggle with the problem in reverse when life changes force them to bargain off the bungalow. On the one hand, her seller sees the staircase in the front hall as the one children, and then grandchildren, crept down far too early each Christmas morning. On the other, the potential buyer sees a loose banister and worn carpeting.

The different points of view and the effect of each on either worldly price or more poignant sentimental value can make coming to terms a difficult process. “My job,” she says, “is to as comfortably as possible inject a shot of reality into my client’s thinking!”  Often an advisor has to do the same for a long-time business owner who concentrates too heavily on and overvalues personal and emotional attachments to the establishment; or maybe who, because they have never viewed the business “from the outside,” underestimates the worth of his or her firm.

There are several reasons an owner should have a realistic view of a business’s worth.

First, many consider what “might be gotten” upon its sale as a considerable asset in a retirement plan. Or second, a fair valuation is important to be sure the terms of any transition agreement are reasonable and equitable for all parties. Third, and perhaps related to transition planning, if the cost of purchase under any agreed buy-out event is to be insured, a good valuation will be necessary for financial justification of coverage with the carrier. And fourth, maybe, if the valuation figure is much higher than expected it can be subtly used by the owner to enhance his or her reputation at the next club party or church supper.

The bad news is that formal valuations can be expensive. A thorough job could run as high as $20,000, give or take a few grand. The good news is that there are informal alternatives available that are adequate for the planning purposes mentioned for no cost and a minimum amount of bother.

We represent at least two carriers who, as a service, will do informal business valuations using just the data from a simple questionnaire and three years of the company’s financial information.

The results assess the estimated worth of the company using several valuation methods common in the industry. The results are in a format presentable for both the client and any tax or legal advisors involved. In addition, we offer support in the presentation of the findings to both the client and the advisors.

In 1803 Emperor Napoleon, burdened by the concerns and costs of a revolt in Haiti and a pending war with Britain, raised some cash by selling the 828,000-square-mile Louisiana Territory to the United States for about 42 cents an acre in today’s currency. Just another example of where an informal evaluation might have helped. Give us a call regarding this important business planning procedure for your clients.