Business Valuation: It’s Not The Size Of The Ship, It’s The Motion In The Ocean
Clearly, there are occasions when out of necessity you need a formula for valuing your business – bank request, shareholder exit – but, the majority of business valuations are generated with an eye to exit, or an advisor trying to convince you to sign their sale mandate.
And there’s an army of “advisors” who will happily take (and often charge) business owners into the twilight zone of pre-sale business valuations. In truth, they often do little more than confuse, frustrate and occasionally destroy the very value they purport to clarify, through raised vendor expectations, market price gaps and the loss of time.
Only last week on Linkedin I saw an article promoting the woefully simplistic valuation method of sector multiples. That’s a bit like the golf club discussion ….. “I sold my software business last week for 15x” …. “Wow, that must be what I can get for mine!”
And yet, two identical looking businesses on the surface may be managed completely differently under it and therefore provide a potential buyer with very different value propositions. Sector multiples can play a part in arguing a position but are not what a business owner should be hanging their valuation hat on.
Business Owners Should Not Be Concentrating On A Valuation Today, But In What Steps Are Required To Drive Best Value Tomorrow
What really matters to a buyer is not some cock’n’bull valuation based on sector multiples (or other mythical creatures), but the core strength and sustainability of the target business. Even a set of sparkly accounts have their limitations because they provide a record of what happened in the past (and with fast moving sectors, a distant past) not what could happen in the future.
What anchors and enhances value are ongoing management and operational features where internal changes can help shift a sale multiple from low to high. Even then, value is often driven by the strategic imperatives of a buyer and finding that ideal buyer, is often as much about good timing, as about good judgment
This Valuation Driver helps to illustrate some of the key operational considerations that can help enhance that sale multiple.
Conclusion: Business Valuation
Driving best value from a business sale requires good preparation beforehand, through getting these ducks in a row, alongside the expert advice during the sale itself. Be highly suspicious of those who push pre-sale valuations, particularly those armed with their far from credible online valuation tools.
When considering an exit – think early, think smart and make sure when buyers arrive, you have sufficient motion in the ocean.
If you need any legal advice to ensure that your business valuation will be at a great price then book a free Startup Legal Session. You get 15 minutes of free legal advice that will help you ensure your ducks are all in a row legally and are ready to sell.