Realising the true value of your business
When small business owners approach me as they regularly do to discuss plans to sell their business it is because they usually have little idea on its worth and are hoping to get an idea from me. Or it is a reality check on their own hopes and dreams.
It’s clearly an advantage to have an objective idea of what it is worth. Back in law school we were taught that a fair value is what an able and willing buyer is willing to spend and an able and willing seller is willing to receive. There is a little bit more to it than that but that will do for today!
I guess the main difficulty with that theory is that it assumes perfect market equilibrium. That is to say it is assuming that both parties are no more desperate than the other. However my observation in business is that this assumption is rarely valid. Usually the vendor is more passionate about concluding the transaction than the purchaser. Or they certainly give this impression.
For that reason I often see the case where sellers discount their business value (much as they discount their goods and services) in order to complete the sale. It is as though the seller is determined to undervalue the efforts that have gone into building the business in the first place. On the other side of the coin there is occasionally the situation where a vendor has unreasonable expectations on what the business is worth. It is a fallacy to think that someone will purchase the business at a value calculated to reimburse an owner for the time and effort that has been put into the business if it does not have the profitability and cash flow generation to go with it. (more…)
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Realising the true value of your business
