By Mike Bloom
The Importance of Understanding Business Value
One of the most common questions asked to a prospective seller concerns the value of their business. It’s important to set valuation expectations on the front-end before approaching the marketplace. To start preparing your business for sale, you need to understand how companies are valued in your industry and the relative performance of your business compared to your competitors.
The first step in acquiring an understanding of business value is to learn how your business compares to its competitors.
Every qualified buyer is going to want to know how your company performs relative to its competitors in the industry. You can determine how the performance of your business compares to its competitors by benchmarking your financial statements.
The process of benchmarking begins by comparing (common-sizing) items on your income statement as a percentage of sales and comparing (common-sizing) items on your balance sheet as a percentage of total assets and then comparing those percentages against the averages for companies in your industry.
Benchmark data can be acquired from online databases as well as industry trade groups. Valuation firms and investment banks often have subscriptions to online databases and might be willing to be provide that information to you in exchange for creating a relationship with them.
You want the ratios for your business to be equal to or better than average for your industry. Revenue growth and profitability should be increasing at the same rate or better than industry average. When you understand your relative financial performance, it becomes easier to explain to a potential buyer where you have an advantage, and as a result can grow.
To understand what your business may be worth in its current state and in the current market, you will need a professional, independent, third-party valuation by an investment banker or external valuation expert.
Business value must be clearly understood and easily communicated. A professional, independent, well-supported valuation opinion provides the strong foundation required to effectively negotiate fair and favorable terms.
Buyers may lose interest in a business if the owner overstates its value. Similarly, a seller can inadvertently negotiate against themselves if they understate the value of their business. That is because in most cases the purchase price stays nearly the same or gets reduced after due diligence and rarely increases later in the transaction.
Without a firm understanding of business value, a transaction cannot be effectively negotiated.
Do you already have a grip on valuation? Do you think you are ready to sell your business? Take the Seller Readiness Quiz to see if you are ready to begin the sell-side process.
About Piedmont M&A Advisors
Piedmont M&A Advisors is a boutique investment banking firm specializing in buy-side and sell-side transactions for businesses with revenues between $10 million and $200 million. We also provide valuation, capital raising, and strategic advisory services.
To learn more about Piedmont M&A Advisors, or to discuss questions you might have today about selling your business, contact us today for a free consultation.