Accepting the Market Valuation of Your Business

September 24, 2015

Business owners regularly ask us for a market valuation of their business. We are always forthright, as the valuations we establish are usually the benchmark prices for our listing and selling activities.

Every month or so a prospective seller, on receipt of our valuation, tells us that (a) s/he was hoping for a higher valuation, and (b) that s/he will “hang on” to the business for another couple of years, working harder to increase cash flow in order to get a more attractive business valuation and sale price.

Over the past 12 years we have heard this story countless times, and I have seen it unfold successfully exactly once. In this single instance, the seller successfully worked on his business for 2½ years to more than double his valuation. We then sold his business at the new, higher valuation level and, at this writing (two years after the sale), both seller and buyer are very happy.

Unfortunately, there are scores of business owners who cannot make their businesses more profitable (and, therefore, more attractive to prospective buyers) and, in fact, experience a back slide in revenues and/or profits. Two or three years later, we are called back to compile an updated business valuation which, sadly, now reflects a business worth less than it was when we first encountered it. Even worse, in my business travels around Michigan, I too often find myself driving by the site of what is now a former business of a potential client. These businesses were not able to enhance their business value and, instead, wound up closing their doors, realizing only liquidation values for their once robust companies.

If you feel that a real world valuation (not necessarily what your CPA or financial advisor tells your business is worth) does not meet your expectations, please ask yourself the critical question: “What am I going to do differently (than what I have always done) on a look-forward basis to increase the value of my business?”

To increase business valuation in any meaningful way, your business will have to show a marked improvement in profits for at least eight consecutive quarters. Do you have the skill sets, energy, drive, and patience to accomplish what my first-hand observations reflect are about 50:1 odds against you? That means there is a 98% chance that, after two years (or longer), your business may not be worth any more than it is right now and, in some cases, it could be worth less.

So, before you say, “I think I will hold on to my business for a couple of years to enhance its market value,” please do some serious soul-searching. 98% of the time not waiting to sell your business will pay off better in the long run.

Contributed by Michael Greengard, Praxis Business Brokers.

Through the Michigan Chamber’s partnership with Praxis, we can guide you through a step-by-step process of the complexities, all while maintaining complete confidentiality. To learn more about selling your business, please contact Lindsay Fulton at lfulton@michamber.com or 517-371-7691.