The Importance of a Valuation when Selling a Business

A recent survey by George S. May International revealed that 58% of respondents had never had a formal business valuation, yet 29% were considering a sale in the next one to four years. I am continually perplexed by the number of business owners who do not regard this step as a critical factor in selling their businesses, especially since the business is probably their largest single asset.

I commonly hear from owners that they do not want to spend the money, their accountant will tell them the value, the business broker should be able to provide a market price, or that they know the price - which was based solely on a gut feeling. After years of running a successful operation, this seems like such a reckless way to handle the final stage of business ownership.

While I believe a valuation is imperative to a successful transaction, not all valuations are created equal. There can be wide disparities in the content of a valuation report, the costs, the credentials of the appraiser and the usefulness in securing a business sale. For example, GCF Valuation is one of the leading independent appraisers in the country. We have found their reports to be comprehensive and thorough, while at the same time being very cost efficient. They have accreditation from all the major governing bodies for professional appraisers.

Below are some of the key points when considering a valuation:

1- Real value. The key to a successful listing is having the business priced appropriately. If the value does not meet your expectations, the report should give you a roadmap of how to increase the value. Understanding the key value drivers can help you run your business more effectively.
2- Unbiased opinion. Prospective buyers are more likely to engage in negotiating knowing that the asking process has been set from someone other than the seller, the seller’s CPA or the business broker.
3- Time. A properly valued business should spend less time on the market, attract more buyers and result in a better return for the seller.
4- Brokers are not appraisers. Contrary to what sellers believe, brokers are typically not certified appraisers. While a broker’s valuable market experience can provide guidance in what the market will bare and generate multiple buyers, they are not equipped to establish a value.
5- Fees vs. returns. It is so easy to get caught up in the cost of a valuation and lose sight of the bigger goal, which is maximizing the return on the business. A professionally prepared valuation is one of the most important tools a broker and seller will have in securing a successful outcome.

A valuation for purposes of selling a business should not be exorbitantly priced. A typical small business valuation should range from $2,500 to $8,000 depending on the size and complexity of the business. Most professional advisors would agree that this is a small price to pay to know the true value of your largest asset.