Why You Should Know What Your Business Is Worth Before You’re Ready to Sell
Most of the owners who call us are responding to something that has already happened. A buyer has made an offer, a partner wants out, or a tax deadline is approaching. We perform the business valuation on the timeline the situation requires, often leaving the owner little opportunity to influence the factors that ultimately drive the business’s value. There is another version of this conversation; it happens far less often. It happens years earlier, when nothing is pending, and nothing is urgent, and the owner simply wants to know what the business is worth. Those clients get something the first group cannot: time to act on what the business valuation tells them.
Most Owners Are Working From a Number They Can’t Account For
Many of the owners we speak with have a figure in mind, and few can say where it came from.
After decades of valuing privately held companies, we find that more often than not, owners believe their business is worth more than our analysis supports. That is an understandable position for someone who has spent twenty or thirty years building the company, and we often find that accountants or other advisors have reinforced the impression without anyone having run the underlying analysis.
For most of our clients, the business is their largest single asset, so a plan built around a figure that will not survive scrutiny can undermine every decision that follows.
Longevity and Reputation Don’t Create Value on Their Own
When we begin an engagement, owners tend to point us toward the things they are proudest of as evidence of value. The business has been running for twenty years, the product is the best in its market, and the name is known throughout the region.
All of that matters, but none of it produces value directly.
Our analysis measures the company’s demonstrated ability to generate profit and the likelihood it will continue to do so, because a buyer writes a large check only when confident the earnings will still be there afterward. For many privately held operating companies, weak or inconsistent earnings can significantly limit value, regardless of how long the business has been around.
The connection between the two is indirect. A long track record and a good name should drive stronger sales, which in turn drive stronger earnings, and those earnings carry the value.
We also look closely at the quality of those earnings, because predictability and sustainability matter to a prospective buyer. Recurring or repeat revenue generally supports a stronger valuation than revenue that must be won project by project, because it is easier to predict.
The Risks That Hold Value Down
Most of what suppresses a company’s value in our reports isn’t a failure of management, but a dependency that built up gradually and became invisible to the people living with it.
The most common of these is owner dependency. When relationships, expertise, and day-to-day decisions all run through one person, a buyer sees a business that changes the day that person leaves, and we have to reflect that risk in our conclusion.
Customer concentration works in much the same way, and a comparison makes the point better than an explanation does. Consider two companies each producing $2 million in earnings: the first has two hundred clients, and none accounts for more than eight percent of revenue, while the second has one client at forty percent and another at thirty. We would value the first company higher, because losing any single customer barely registers there, whereas in the second a single phone call can change the business overnight.
Key employee dependency is a narrower version of the same problem. Where one person holds the relationship with a major account or carries expertise that no one else in the company has, the performance we are being asked to value is tied to whether that individual chooses to stay.
We look at revenue composition for similar reasons, since work that has to be won again every quarter carries more uncertainty than revenue that renews on its own.
None of these conditions happen on purpose. A concentrated customer usually started small and grew alongside the business, which is a success story right up until it becomes a risk, and owners who have lived with these arrangements for years understandably stop noticing them. A buyer is likely to notice quickly in diligence.
Time Is What Makes Them Fixable
Many of the risks above can be reduced, but very few can be reduced quickly.
Building a management team that doesn’t depend on the owner can take years, as does meaningfully diversifying a customer base. Adding a second and third point of contact inside a major account, so that the relationship no longer rests on one employee, requires deliberate effort sustained over time, and moving from project work toward recurring revenue can mean changing how the company sells.
These changes also become harder the longer a business has been running, because loyalties form and ways of working become entrenched. Roles that made sense a decade ago become difficult to restructure, less because anyone objects to the idea than because everyone has organized around them.
An owner who learns about these risks with a long runway ahead has room to address them. An owner who first hears about them from a buyer during diligence has almost none.
Fixing the House You Still Live In
A familiar comparison for getting a business ready to sell is this: You fix the house before you list it, with fresh paint, the clutter cleared out, and the repairs you have been putting off finally handled.
It is a fair comparison, and it raises a question worth sitting with. If those repairs were worth making before a sale, why were they not worth making years earlier, when you could have lived in the improved house yourself?
The same logic applies to a company. Reducing its dependence on you raises the eventual sale price, and it also means you can take a vacation and the business doesn’t stop when you are unavailable. Diversifying a concentrated customer base makes the company more attractive to a buyer, and it also means one lost account no longer threatens your livelihood.
The improvements that make a business more valuable are largely the same ones that make it easier to own, and the owners who make them early collect the benefit twice.
What an Early Business Valuation Gives You
A valuation performed well ahead of any transaction gives you what a last-minute one cannot. It tells you where the company actually stands rather than where you assume it stands, identifies the value drivers and risks influencing the conclusion, and helps you see which areas may deserve attention first.
Then it gives you the runway to do the work.
When to Start
Well before you need one.
The right timing depends on the company, the industry, and what the owner is ultimately planning. For many business owners, that means revisiting the business valuation every two to three years, and sooner when the business changes materially. The principle is simpler than any fixed rule: the earlier you understand your value, the more time you have to act on what you learn.
If you have never had a business valuation and you expect to transition out of the company eventually, whether through a sale or a transfer to the next generation, understanding its current value can give you a much stronger starting point for exit planning.
We also recommend revisiting a valuation whenever the business changes materially, whether through significant growth, a shift in the customer base, a change in the management team, or a change in your own plans.
Frequently Asked Questions
Do I need to be planning a sale to get a business valuation?
No. We prepare business valuations and business appraisals for estate and gift planning, buy-sell agreements, partnership transitions, succession planning, and strategic decisions unrelated to selling. Our reasons to value your business page covers the full range of situations we handle.
Will a valuation tell me how to increase business value?
Our reports identify the factors affecting your value and explain how each one influences the conclusion, pointing clearly to the areas worth addressing. We review the findings with you and discuss where your attention is likely to matter most.
Is it worth getting a business valuation if I have no intention of selling soon?
That is often when it is most useful, because you have the most room to act on it. Owners who understand their risk profile early can address it while the changes are still straightforward to make.
Find Out Where You Stand
If you have been running on a number you cannot fully account for, the first step is to find out what your business is actually worth while you still have time to act.
To discuss your situation and learn about our business valuation process, time frame, and cost, call Stephen Goldberg, Managing Partner, at 800.232.0180, or complete our form, and we will get back to you shortly. We offer a no-charge initial consultation and provide a fixed-fee quote before any engagement begins.
Sun Business Valuations provides professional business valuation services to privately held companies throughout the United States.