Valuations – Art or Science?
Our team has over twenty years experience in business valuations and spoken at national conferences, meetings and/or roundtables, and we have been asked many times, “How do you determine the value of a business?” or “Is there a formula I can use to value my business?”. We also had business owners tell us that they do not need anyone to value their business because a competitor sold for X, so they are worth Y. Maybe, a broken clock is right twice a day, but more than likely they are wrong. Business valuations are just as much as art as they are a science.
A key point to remember is that valuation is always forward-looking concept. Even if the Company is coming off of its best year ever, if the Company’s pipeline is depleted then this would tremendously impact the value perceived by any prospective buyer. As appraisers, one of our primary tasks is to quantify the future economic benefits (cash flows) a potential buyer would recognize. Then once we have a clear picture on those economic benefits, we turn our focus to documenting the commensurate risk with achieving those benefits.
Some may say they don’t have a crystal ball to predict the future; however, as professionals we conduct a great deal of research on both the company and industry to provide a meaningful story of not only the DNA of the company, but also identifying key attributes including:
- Preparing in-depth financial analysis of the Company’s recent performance;
- Interviewing management to gain a thorough understanding of the leadership team behind the organization;
- Identifying and documenting all risks and opportunities for the subject company, as well as expectations for the future;
- Utilizing industry and other available resources to benchmark the subject company’s historical and future financial performance;
- Analyzing current economic conditions and outlook to determine if management’s projections are reasonable; and
- Searching the proper financial databases to pull current trading or pricing information on publicly traded and privately held companies in the same or similar industry as the subject company.
A business valuation entails many moving parts, and most importantly, considers characteristics specific to the subject company such as financial performance, depth of management, scalability or growth prospects. Then after these considerations, the appraiser also spends significant time researching the company’s relevant industry and considering national, regional, and/or local economic factors. It is inappropriate to assume that an online calculator, which ignores the “Art” of the business valuation would be able to properly determine the value of a business.
Whether you are a business owner who is just curious to know the value of your business or you have received an unsolicited offer and need to determine if it is something that you should consider, please reach out to us anytime you are in need of receiving a credible valuation.
Transfers to Management Team / Key Employees
Transfers to Employees (ESOPs) – Overview
Transfers to Employees (ESOPs) – Technical Discussion
This article is simply a high-level overview of complex topics and does not constitute valuation, tax, or legal advice. Readers of this article should seek the services of skilled and experienced professionals.
Vision Point Capital focuses its services in three pillars of consulting for business owners: 1) Valuations; 2) M&A Advisory, & 3) ESOP Advisory. Working with business owners and their advisors is in our DNA. Please check out our website at www.visionpointcapital.com for more information about our services and team members.