What’s the Value of My Business?

I sat through several meetings as an interested buyer with owners wanting to sell their companies to my corporation. The concept is relatively simple to understand. However, the process of closing a deal is arduous. The difficulty centers on determining the value of the seller’s company and the buyer’s risk sensitivity in achieving their return on investment.
Over time I came to realize that owners often overvalue their companies. I certainly understand why. They put a lot of sweat equity into their business and have a loyal customer base and sellable products or services. They spent years building their businesses, have pride in what they’ve grown, and are emotionally attached to the organization and its people.
A buyer’s interest, though, is minimizing risk and maximizing return. With a high degree of confidence, they want to know how long it will take for them to earn back the money they invest and what the future return will bring. Imagine buying a used car. The outside looks beautiful. No dents and scratches appear, and it has a remarkable, dazzling sheen. The prudent, prospective buyer will always check under the hood and assess how well the car runs and how many more lifetime miles it has—the more faultless, the higher the value. The same is valid for acquiring a business. A prudent, prospective buyer will want to check under your company’s hood and assess how well the business is running and the growth potential. Like the used car, the more pristine the business, the higher the value.
Of course, a buyer will first check the company’s financial health. How much money is the business earning, what are its capital investments, what debt it has, and how does the cash flow through the company? A lack of fitness in any of these areas may become a red flag that, until resolved, discounts the company’s value and diminishes a buyer’s interest.
There are several other factors buyers evaluate that sellers often overlook. How much life does the company’s core product or service have in the marketplace, and can it retain and grow its market share? How dependent is the company on a single or a few customers or vendors that losing either would be detrimental? How much of the company’s capacity is exhausted, and are there possible ways to scale? How dependent is the company on its owner or a few key people to generate sales? How stable is the company’s workforce, and is the organizational climate positive? Is the company led and managed effectively, and are qualified and experienced leaders and managers in place, and for how long?
In any merger or acquisition proposition, the seller wants to maximize their company’s value, and the buyer wants to minimize their risk and maximize their return. Sellers who use a very deliberate and thorough valuation process, then work on under-the-hood areas that need improvement, will maximize their value and be able to negotiate very favorable terms whether being merged with or acquired by another entity.
COL Paul A. Raggio (Ret), the owner of Five Star Leader Development, is a fractional CEO/COO who develops C-Suite executives, business owners, and their management teams on leadership, management principles, and best business practices. His email address is paul@fivestarleaderdevelopment.com, and his phone number is (252) 571-7368. Visit his website at https://www.fivestarleaderdevelopment.com.