14 Aug Do You Know What Your Business Is Worth?
For many New Mexico business owners, their small business is one of their largest financial assets. Despite that, few have a realistic understanding of what that asset might be worth, and even fewer have a solid grasp on what drives value in a sale.
That may seem inconsequential if selling is still years away, but putting a value on your business is more than an exit-planning exercise. It can help you make better decisions today, identify weaknesses while there’s still time to address them, and determine whether the business is moving toward meeting your long-term financial goals.
What kind of business analysis is needed?
Not every owner needs a formal business appraisal. What’s appropriate depends on the purpose.
A formal appraisal is often necessary for estate and gift planning, litigation, divorce, ownership transfers, or other circumstances requiring a documented opinion of value prepared under a defined professional standard. But an owner contemplating a sale doesn’t need that degree of complexity. They’re often better served by a broker’s opinion of value or preliminary market assessment focused on likely buyer demand, available financing, and current transaction activity.
These analyses are answering for related but not identical questions. A value developed for a legal or tax purpose may differ from what buyers are likely to pay, what lenders will finance, or how a transaction will ultimately be structured.
For an owner considering an eventual sale, the most useful questions are often practical ones:
- What earnings could reasonably transfer to a new owner?
- How dependent is the company on the current owner?
- What risks would concern a buyer or lender?
- What price and transaction terms could the business realistically support?
- What changes made now could improve the outcome several years on?
The purpose isn’t simply to arrive at a number; it’s to understand the factors that create, or possibly limit, transferable value.
What precisely isa buyers look for with a business acquisition?
According to the UBS Investor Watch survey, 58% of business owners planning to exit had never had their businesses formally appraised, and 48% had no formal exit strategy. Many owners dedicate years to building successful companies without developing a clear understanding of how buyers will evaluate them.
Buyers generally begin with the company’s historic earnings, but they also consider the reliability of the financial records, customer and supplier concentration, recurring revenue, staffing, competitive position, condition of the assets, and working capital and CapEx needs.
Owner dependence deserves particular attention. A business may generate substantial income for its current owner but still be difficult to transfer if that owner personally manages the customer relationships, performs the technical work, supervises employees, and makes every important decision. Buyers are paying for earnings they believe will continue after the ownership transition, not purely for the results achieved under the seller.
Similarly, inconsistent financial reporting or intermingling personal and business expenses may not mean the business is poorly run, but it makes its performance harder to verify. That uncertainty can complicate deals, potentially affecting both price and terms.
Sam Goldenberg & Associates helps owners spot these issues early, while there’s still time to fix them instead of having to explain them away later. Owners often have real ideas for growing the business, but an idea you haven’t acted on doesn’t carry much weight. Buyers’ response is usually: if it’s so easy, why isn’t it already done? Talking those ideas through with someone outside the business can help you figure out which ones are worth executing before you go to market, not just discussing. And that’s easier to do while you’re still energetic and engaged, not after you’re burnt out.
Why is it helpful to regularly get a valuation?
An annual formal appraisal is hardly necessary, but a periodic BPO and check-in helps keep you informed of the company’s likely market value, the drivers behind it, and how the banking world is evolving.
More than just a matter of a tracking the headline price, it is an opportunity to discuss other matters – improvements in profitability, revenue diversification, owner dependence, and the consistency of the financial record keeping. Sometimes when SGA is sitting across from a business owner, we may note that COGS have been steadily creeping up, but that retail pricing hasn’t kept up. Some business owners may have overlooked this simple measure, either because they’re so busy with day-to-day operations or they worried about how customers will respond. Stepping back to take a big picture of view can feel like a luxury. That’s where Sam Goldenberg & Associates can come in. We help provide that outside perspective, and we do it in a non-judgemental, collaborative manner.
Sometimes. . . stuff just happens
You don’t always get to pick the right time to sell your business. An unsolicited offer, a partner’s retirement, a health issue, family transition, or a new opportunity can create the need to act. Knowing where you stand before it does is the difference between a decision and a scramble.
If you’re still the one making the business run day to day, the one generating the sales, the one carrying all the institutional knowledge in your head, that’s a problem a buyer will price in. There’s a lead-up to a successful sale, and the businesses that get there in good shape are usually the ones that started thinking about it before they had to.
