Are You Overestimating the Value of Your Business?

Have you ever been in a situation where you learned that others don’t view you the same way that you view yourself? Perhaps in a salary negotiation or an interview for a promotion you learned that your employer didn’t quite view your skills and experience in the same way that you did. Or maybe in a meeting with a teacher or coach you learned that your child was struggling in ways that you hadn’t noticed.

It’s common and natural for all of us to view ourselves in a more positive and favorable light than others may perceive us. On a recent episode of Right on the Money, host Steve Savant and Milestone Coach Advisory President Caine Nakata discussed this phenomenon and how it can be especially impactful for business owners.

As Steve described it, the “sin of uniqueness” can cause business owners to overestimate the value of their business. They may overvalue their work and sweat equity in building the business, or they may overlook challenges that could make the business less competitive.

This inflated perception of their business isn’t intentional. After all, most business owners are so wrapped up in running and growing their business that they don’t have time to see the big picture. They may not be able to objectively view how their company fits into the overall market or how a potential buyer may analyze the business.

Of course, this overestimation of business value can have a significant impact on efforts to sell the company and retire. A business owner may demand a sales price that is too high and he or she may be insulted by lower offers. That approach could discourage potential buyers and thwart a sale.

Caine and Steve discussed strategies business owners can use to form an objective and practical valuation estimate. Caine suggested that businesses analyze themselves from three different approaches and then blend the results to formulate a valuation range.

 

Income

The first valuation approach that Caine discussed was an income analysis. This is an evaluation of the business’s income or profitability. It’s likely to be a core element in any analysis by a potential buyer, so it’s important for business owners to understand how a buyer may perceive the company’s profitability.

According to Cain, many business owners overestimate the impact their company’s profitability has on valuation. Buyers often use a multiple of income to generate a valuation estimate. For example, a buyer may multiply annual income by three to develop a quick ballpark value.

Caine said that many selling business owners feel the multiple should be higher, perhaps as high as 10 or 20. Obviously, a multiple of three results in a much lower number, which can be disappointing for a seller.

However, by using reasonable, conservative multipliers from the outset, you can avoid the trap of inflated expectations. You can then implement steps and strategies to increase your income to reach your target sale price.

 

Market

Caine also discussed a market approach to valuation. This is a more subjective analysis that involves analyzing a business’s place in the overall market. The analysis could include a review of products, services, market share, competitive advantage and more. It relies heavily on transactions involving similar businesses, such as recent sales or rounds of investments. Those numbers provide a starting point for valuing a company.

Caine compared market analysis to the process of buying and selling a home. Housing prices are often closely tied to nearby comparables. Both buyers and sellers use recent sales of similar homes in the area to justify their stance in negotiations. Market analysis for businesses is very similar.

 

Asset

Finally, some businesses may have significant value in their real assets. For example, they may own valuable inventory, equipment, or real estate. Caine mentioned that in Hawaii, the real value of the company may not be in the business itself, but in the business’s building and land. Asset valuation has to be included to account for potential value that isn’t reflected by income or market analysis.

Ready to develop an accurate value for your business? Let’s talk about it. Contact us today at Milestone Coach Advisory Services. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.

 

Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

16766 – 2017/6/20

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