It is important for business owners to make good use of a professional valuation service, particularly if he or she plans to sell his or her company. If you don’t want to risk losing money by undervaluing your business or pushing away prospective customers because of an overvalued price, then it’s critical to value it correctly.
To help you understand the importance of getting a third-party business appraisal before going to market, here are several points to keep in mind.
Points to keep in mind
- The Buyer’s lender will demand one. And there is a good chance yours will match the one subsequently ordered by the Entering buyer’s bank. Do you only want an appraisal from the buyer’s and lender’s perspectives?
- Pre-financing can be an option for the potential Entering buyers of your business. This also gives you insight into the buyer’s capacity and character. If the Entering buyer (key employees or outsiders) is not creditworthy, you don’t waste precious time. You also minimize the ensuing confidentiality risk.
- You are in control of the selling price. What be more needs said?
- You are in control of potential buyer’s offering price and their perception of your business. Remember, your business only gets one chance at a good first impression.
- If the appraisal comes back lower than your Exiting Strategy needs, steps can be taken to improve your business’s cash flow before it is too late. You do not want the rude awakening that could come from an educated buyer’s low-ball offer.
- You are in control of the buyer’s team of advisors. Also, data gathering during the appraisal process can reveal any potential due diligence problems that could arise later.
- Your business will stand out versus the poorly presented businesses for sale. Remember, your business is competing against other investment opportunities that potential buyers are investigating. The certified, third-party appraisal makes your business look more appealing and professional.
- We live in a litigious society. The certified, third-party appraisal is your best weapon against buyer’s remorse and any charge from the buyer that they overpaid.
- A rule of thumb appraisal or one done by a member of the Exiting team could be seen as tainted. A potential buyer will discount the asking price if a qualified, certified, third-party business appraisal is not done at arms-length.
Valuation from accountants or lawyers
Some business owners seek valuation advice from accounting professionals or lawyers. Accounting companies, however, are too cautious and often undervalue their clients’ businesses. Law firms, on the flip side, have a tendency to be overconfident and overrate their clients’ companies. They can overlook qualitative variables such as the overall environment, market trends, size of the company, financial efficiency, management skills, and industry structure.
Remember that if you’re selling your business to a bigger company, you’ll almost certainly be negotiating with an investment team that employs extensive economic modeling and analysis. If you have a thorough valuation planned using income-based valuation models, the business would be even more satisfied with your management skills.