This may seem like a strange question to be posed by a valuation shop. To be sure, there are excellent reasons why a valuation is very valuable. For instance, if a business (or marital) split is imminent and assets need to be divvied-up. Or, a company may need a periodic valuation to fulfill the needs of its ESOP obligations. In situations such as these, a business valuation is invaluable and worth the money. (Valuations aren’t cheap, as potential legal ramifications necessitate the investigation of every possible angle, making the process labor-intensive.)
However, if the request comes from a business owner who is interested in the company value as “an input” to figuring out an exit plan, we may well advise saving the appraisal money and, instead, reinvest a portion of those funds into a developing a solid exit strategy for the following reasons:
(1) By investing in a valuation/appraisal, the business owner gets an “indication of value,” a number which is the main point of the report. Sure, there are also the adornments of descriptive commentary regarding the company and its risks/opportunities. But, the owner knows much of that already. The indication of value is new information, but, for the owner, there is no roadmap beyond that.
(2) Most valuation experts would agree that the best indication of a business’ value is a bonified offer from an interested buyer. Depending on the circumstances of the particular buyer, the offer may or may not resemble an outside valuation number, which is subjective.
(3) Armed with a paid-for valuation estimate, the business owner will still be missing many necessary pieces of the exit puzzle. How does the owner want to exit (selling to an outsider, insiders, or passing to family members.) Which plan is most feasible given the owners’ plans for the next phase of life? How much is the business worth without the owners? What sort of tax planning might be critical in front of an exit transaction? Etc.
(4) Most business owners don’t realize that a good exit strategist can give a reasonably good estimate of a firm’s value as long as the advisor has the requisite experience as well as access to relevant databases. Indeed, a number robust enough to provide the input from which other decisions can be made. (Including taking steps to improve potential selling roadblocks like owner-dependency and customer concentration.)
(5) Finally, while official valuations are often essential, they create a paper trail that could complicate future plans. For instance, an owner might hire an appraiser who becomes bullish about the subject company, and assigns a high valuation accordingly. This high value might be good for the ego but could also complicate an owner’s desire to “pass” the firm to his/her children in a tax-efficient manner.
Questions? Please contact us at DM Buck Advisory, LLC (david@dmbuck.com).
Based in Atlanta, Georgia, DM Buck Advisory, LLC provides business owners valuation/appraisals, stronger messaging with investors, or, through our partnership with NAVIX Consultants, a working roadmap towards a more efficient and successful ownership exit.