As business owners approach retirement, many begin to realize that they know very little about the value of the asset into which they have invested significant money, time, sweat and tears. A good number are surprised when they discover the apocalyptic truth about the realizable value of their businesses. In short, a seller's perception of business value may not match reality-often because reality is based on the marketplace's perceptions rather than the seller's idea of phantom value. Fortunately, huge value enhancement opportunities exist for business owners and their advisors, and the implementation of timely strategies can replace "phantom" business value with real and bankable wealth.
Managing The Client
First and foremost, advisors must understand the business owners' perspectives so expectations can be managed or recalibrated appropriately. I've found that most business owners have one of three common mind-sets when it comes to their understanding (or misunderstanding) of business valuation issues, as discussed in the chart on page 40.
What really makes one business worth more or less than another business in the same industry? A variety of things can impact the actual or perceived value of a business, but not all of them can be managed. Fortunately, there are ways for a business owner to increase the value and at the same time manage risks that might compromise the organization long before a potential buyer enters the picture. An understanding of these issues, much like a look at the pros and cons, will help advisors better prepare their clients for the valuation, and, ideally, for a highly profitable transaction.
Informed buyers will engage in a thorough due diligence process designed to find both the assets and the risks in a business. In fact, it's common for buyers and their representatives to concentrate on risks as a way to negotiate the lowest possible price. When business owners know what characteristics about the business offer value and how to improve on these advantages, it strengthens the overall performance of a business and can result in a better price at the point of sale. You should work with your business owner clients to document and substantiate these "value drivers" and, when possible, position them so they can be transferred to a buyer.
The chart on page 41 discusses some common value drivers and how they can be developed more fully.
Risks, or problems, can detract from the value of a business in many ways. Operational difficulties can hurt efficiency, effectiveness and profitability, and potential buyers will respond to high perceived risk by decreasing their offering price. The reverse is true as well-when risks are eliminated or mitigated it can increase the price of a business. A business owner and his or her advisors should know the risks associated with the company in question so weaknesses and problems can be corrected and there are no surprises during the due diligence process.
The chart on page 42 includes potential risks facing a business and some questions to determine if the situation can be improved or requires attention.
It goes without saying that companies may have other sources and detractors of value than those discussed here.
Furthermore, an owner's personal style and stated goals can heavily influence how the opportunities and issues identified during the valuation planning process are handled. The most important role an advisor can play is providing guidance and support to his or her clients during what is often a stressful and exciting time, and reinforce the accretive benefit of advance preparation and documentation in maximizing and realizing the inherent value in a business. More information and educational tools on business valuation is available through The National Association of Certified Valuation Analysts at www.NACVA.com.
Grover Rutter, CPA/ABV, CVA, BVA, is a partner in the firm of Grover Rutter Mergers, Acquisitions and Valuation in Findlay, Ohio, which specializes in valuing and selling middle-market companies. With more than 30 years of experience in accounting, taxation, valuation and business sale transaction experience, Mr. Rutter is the author of numerous articles and books, and a frequent speaker at industry events.