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OPINION

Hendrik Oudeman: What is My Business Worth? What is My Business, and What is Worth …

Hendrik Oudeman: What is My Business Worth? What is My Business, and What is Worth …

There is an old tale of a small boy in a little village who couldn't find his mother. The people of the village asked him what his mother looked like, and the boy answered that she was the most beautiful woman who ever lived. The villagers then began looking for her, and brought him all of the well-known beauties in town – but none of them were his mother. All of a sudden, a very simple-looking woman entered the village and the little boy lovingly ran into her arms; this was his mother. To that boy, his mother was the most beautiful person who had ever lived, no matter how she appeared to others.

This tale expresses precisely how most business owners feel about their business. For this reason, it is very difficult for a third person to appreciate that business as the owner (and often founder) does. When the owner wants to sell the business, however, it is not how he or she values at the business that counts, but how a potential buyer evaluates it.

Any serious process of selling a business should start with a third party valuation; the owner needs to get a realistic picture of what his business is really worth and the professional M&A adviser should get a good understanding of the value and the value components before deciding if he can sell the business on and at what price. “Professionals” that will take the representation of a business for sale without a proper valuation are likely playing the numbers game.

A helpful way to realize the necessity of valuation is to ask yourself the following question:

"Do I (the business owner) know exactly what the value of my business is today when asked by an interested party (buyer)?"

Now, many owners will say they have a pretty good idea and that they are perfectly able to explain how valuable their company is to any "serious" buyer; it is also often suggested that a buyer who does not see the value as the owner does is not a serious buyer!

Let’s go over the question of value, word for word, and explain in detail what each part of the question means:

Do I ...                           meaning you, the owner, not anyone else's opinion or calculation!

know exactly ...             meaning no educated guesses here, but hard proof!

what the value ...          meaning value as in the worth of the assets, the potential to make a profit and earn salaries based on past performance or future cash flow, comparing with other businesses etc. in euros, in one single pay-out or with payment conditions

of my ...                       meaning mine as in one single owner or are there any other share-holders (is there a (ex-)spouse, nuptial agreement?)

business ...                   meaning your company's shares or all or some of the assets, tangible and intangible, on the balance sheet, at the right value, including or not the accounts payable, the creditors, loans and guarantees, bank accounts, patents, clients lists, tax contingencies?

is today ...                    meaning right now, not based on last year or the last available figures or the better times in the past or the promising (but uncertain) future!

when asked by an interested party…?    meaning a serious buyer (you know how to separate the serious from the curious, right? and how to find them?) with what purpose to buy what, enter the market, eliminate a competitor, close and sell in pieces, find a new niche etc.


Going over this question in this way will make most business owners aware of the fact that there is no easy answer to this seemingly simple, straight-forward question.  Indeed, if you are not sure of the value of your business, consider this:

You then need to realize that value is not the same as price (value is what you have, price is what you ask), and that the price is most likely not what a buyer will pay, and conversely what a buyer will pay is not what an owner will receive.

A company which is valued properly, with up-to-date and transparent records, is an entirely different "product" to sell than an owners' “I did it my way” business, with a “that’s the way I like it” administration without proper documentation, or well-defined and classified figures. 

You want to negotiate the sale of your company for the right price and on terms you can accept; you do not want to spend your meetings with serious buyers giving explanations and corrections all the time, about all sorts of data which is lacking or is not complete, correct or understood; financial statements that are not clearly defined or classified; or trying to justify what is not supported by documents or explaining what is, just plainly, wrong. 

No serious buyer will stick around that process and you will end up with no sale, or a sale with very unfavorable conditions.

Failing to plan is planning to fail; if you do not care to get a professional valuation for your business, do not expect to attract professional potential buyers!

 

About: Connecor is a business transfer agency providing expert transaction management to private businesses and companies, during the transition period when the ownership of a business or company changes hands. Connecor offers services to assist business owners to plan for their exit, and future owners in finding and entering a business; with a special focus on small and medium-sized businesses in Europe, Latin America, Southeast Asia and the Middle East. The company has developed proven business exit and entry strategies to facilitate the whole process, and helps its clients to define their objectives and to identify the best alternatives based on their goals and targets. Core services include: 1) Planning your business entry / exit strategy, 2) M&A, and Business Brokerage, 3) Promotion of Investment Opportunities, and 4) Specialized Business Transfer Services.  You can visit www.connecor.comfor more information.

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