Given how critical it is for privately held business owners to know what their company is worth, I thought I would revisit the topic. If nothing else, if you are doing any estate planning at all, knowing what your company is worth is vital. Most business owners that we meet with have somewhere between 80-90% of their personal net worth tied up in one highly illiquid asset: the company they own.
Not only does this make estate planning tough, it also exposes the financial legacy you want to leave behind to your offspring to tremendous risk. But even if you are not planning to exit any time soon, knowing the value of your company today will allow you to take steps over the years to enhance and grow its valuation.
In the Generational Equity system, this is called our “Roadmap to Enhancing Value” and has proven time and time again to be valuable for those business owners who are 5 years or more away from retirement, as it allows them to take our recommendations and enhance the value and future sale-ability of the business.
But the first step under any of these scenarios is the initial evaluation of the business to determine its current market value. I recently came across a fantastic article written by Edward Mendlowitz, partner emeritus with WithumSmith+Brown, PC. Mendlowitz has more than 40 years of public accounting experience and is also accredited by the American Institute of Certified Public Accountants (AICPA) in business valuation and certified as a personal financial specialist (PFS). Oh, and he has written 24 books on accounting and related topics. So you can consider him an expert when it comes to company valuations.
The article he wrote was posted on quickreadbuzz.com, an online publication providing news and information for financial consultants. It was entitled “50 Reasons for a Business Appraisal.” To be honest with you, I had no idea that there were 50 reasons! And I have been studying the topic of business valuations for years, so Mendlowitz has done a very thorough job of helping business owners understand just how important business valuations can be. This is part of his opening:
Running a business causes owners to make dozens of decisions daily, many times without much advance thought and consideration. Unfortunately, it can become easy to lose perspective amidst competing priorities and deadlines. Having the business objectively and comprehensively valued—leading to a Conclusion of Value or a Calculation of Value—provides a look into how others would view the business, the size and scope of the asset that has been created, and identification of important and sometime latent value drives. The process of having the business valued can provide benefits far greater than the nominal cost.
We concur with Mendlowitz: The value to the business owner (even if the owner is years away from exiting/retiring/selling) far outweighs the cost of the evaluation. And here is why, as I have highlighted above: It provides a look into how others would view the business.
“Others” includes the professional evaluation team doing the valuation but also, most importantly, potential buyers and investors. This is eye-opening for many business owners we work with. They are so busy running the daily operations of their business AND they have no experience as buyers that they are unable to objectively view the strengths and weaknesses of the business – the fundamental issues that impact the perceived risk associated with the company by potential buyers.
For example one of the BIGGEST issues that causes concerns among professional buyers is excessive customer concentration. However, for many of our clients, they see the relationship that they have built over the years with Client X who represents 50% of revenue as a positive. On the one hand they are correct. To cultivate a relationship like this takes time and the ability to deliver on what you promise.
However, from a buyer’s perspective, any client generating that much revenue, who can walk away at any time (especially if the current owner is the primary contact with them), is a risk. But this is just one example of how a professional evaluation team like Generational Equity can help you see the business objectively and take steps to enhance the company’s sale-ability and value to buyers. By the way, the M&A Advisor recognized Generational Equity last year as the 2020 Valuation Firm of the Year. No team has done more professional valuations than us over the past few years.
Getting back to Mendlowitz’s top 50 for a moment – time and space do not allow me to cover all 50. If you want to see them, review the entire article.
Several of his 50 reasons stand out based on our experience, so I have narrowed his 50 down to the Top 10 Reasons To Have Your Company Valued (paying homage to David Lettermen):
Some of these we have already touched upon and others are self-explanatory. I have highlighted four of these above that based on my experience are the most important benefits of going through a professional valuation process. And I hear this all the time from clients we have successfully sold: The valuation alone was extremely valuable.
As Warren Peck, former owner of Phoenix Rising Aviation, said, “No one likes to be told their baby is ugly, but I appreciated the honesty and reality that I needed to make some improvements.”
The four reasons for a business valuation that I’ve highlighted all revolve around a common theme: helping the business owner objectivelyanalyze his business and future business decisions in a whole new light as a buyer would.
“Going through the Generational Equity evaluation process actually made me a better CEO,” Brent Roth, owner of UST (a company we sold in 2013), recently told me. “The decisions I make now are based on facts and data, concepts that Generational Equity showed me were vital for the health of my company.”
Now the reality is, as Warren Peck said, you may not like the initial valuation of your company. But just as you don’t necessarily like what your doctor tells you, you still value his information because he is being objective about your health. The same is true for any reputable, professional valuation firm: If you are wise, you will heed their input on your business and plan your future based on their valuation.
If you are a business owner and like most, have no idea what your company is worth, I strongly suggest that you contact Generational Equity and discuss our business valuation services. It really is a vital first step in any strategic planning you may do going forward.
Contact us to learn more.
And special thanks to Edward Mendlowitz for creating such a timely, relevant article for business owners.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2021 Generational Equity, LLC. All Rights Reserved.
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.Betty L. Brennan, President, Taylor Studios
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.Rick Greene of Dobbs Equity Partners LLC
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward. P.S. Given my experience with GE I felt comfortable enough to sign up with Generation Wealth Advisors!Tom Currier, Former President & CEO, Rackmount Solutions
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
I wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.Shane and Johanna Kline, Owners of Vision Upfitters
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.JoAnn Ellis, Owner of Fondren 5 Star Kennels
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!JoAnn Ellis, Owner of Fondren 5 Star Kennels
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.Salvo Stoch, Founder and CEO of Sleeping Partners
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.Caroline Connelly, CEO, OptoTest
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