What’s Your Company Worth? A Lesson in Business Valuation
Do you understand the true value of business? Is your company properly positioned for sale or transfer of stock ownership?
Adam Herman, Director of Consulting, CPA and Accredited Business Valuator with Mueller Prost PC, paid a visit to TNtv to discuss how a business owner can value their company for a potential sale or merger.
In part one of a two-part series, Herman explained that businesses are often sold for several reasons. This can include an exit strategy, handing over shares to family members, exploring a possible merger or unfortunately selling due to a divorce.
Mistakes Business Owners Make
Herman works with private companies. He said he finds mistakes with both those who wish to buy as well as those who wish to sell their business.
He said buyers often make mistakes by not doing enough due diligence before purchasing a company.
The biggest mistakes sellers make is not properly preparing the business for sale. For example, the owner is more focused on gross rather than net proceeds. Focusing on the net value is what really matters.
Business value includes both tangible as well as intangible assets. Tangible assets can include inventory, account receivables and other fixed assets. Intangible assets can include the company name, reputation, business location, patents, workforce and customer lists.
Business owners often mistake their own personal good will as an asset. Unfortunately their expertise and relationship with customers, in most cases, belong to them and not to the company. A business owner will not have an employment agreement with their own firm or a non-compete contract. This is considered outside value. Most astute business buyers will understand this.
Herman said business owners should be aware of the many factors that drive down company value. This can include too much concentration with just a few customers. Should one of those customers leave for any reason the business could be in a precarious position. A limited number of key suppliers can also present a problem. Should a key supplier have problems or close, it can negatively impact business operations. This will make the valuation more risky.
A lack of financial reporting also drives down valuation. Businesses should generate these reports on a monthly basis and have them available for potential buyers. This can include income statements, balance sheets and cash flow statements. The ability to produce these reports quickly and accurately helps the owner operate more efficiently while adding more credibility and value for possible purchase.
To learn more about how to value your business visit www.muellerprost.com.
Watch the full episode below! Then, read up on Part 2 of our visit with Adam.