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 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.
© 2015 Generational Equity, LLC. All Rights Reserved.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
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
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
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
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
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.
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
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
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
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
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.
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.
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
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 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
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
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