A common misconception about business valuations is they are simply calculations that provide insights on their own accords. However, nothing could be further from the truth.
If all you have after you go through the valuation process is a bunch of numbers on a report, you did not receive a proper valuation. According to the New York University Stern School of Business, a worthwhile valuation should be the bridge between the numbers on the page and the story of your business. The numbers are bound together by a coherent narrative, and the storytelling is kept grounded with numbers.
To that end, this article explores what should be included in your business valuation narrative so you know what to look for in order to receive the highest quality business valuation.
- Your appraiser understood the landscape for the story
As in any story, you first need to do the groundwork to understand the context for the valuation itself. In your business valuation story, the valuation professional should survey your business landscape closely. Along with looking at specific industry and macro trends to set the stage, the business appraiser also needs a deep understanding of what the business does, its suite of products or services, the management team, company history, and the employee base. They will also want to dive into the competitive landscape and competitive advantages your company has in your sector, so they can answer why customers buy from you as opposed to another company.
- The numbers don’t speak for themselves
Numbers independent of context are often meaningless. If the valuation puts too much emphasis on the numbers and equations and values and not the story behind them, your valuation is little more than a “plug and play” exercise. This is where most business valuation software platforms fall short. If you are getting numbers only and no story, you’re not getting the value you deserve or the true value of your business.
- The story is connected to key value drivers of the business
Post-valuation, you should feel that the story being told is connected to key value drivers of your business. For instance, let’s say that the valuation story being told is that your company has a strong competitive edge in the market. Does that translate in the numbers? Have they justified this story by examining your profitability and growth potential in a way that makes sense in your industry? Every assertion made needs to connect back to key drivers and be rationalized with numbers.
- The story of the future makes sense
Part of any business valuation is, in essence, predicting the future of your company. A good valuation must create a narrative of your future that is consistent with your plans, plausible given what you have available, and probable based on what else is happening in your industry. If the valuation tells a story of massive growth potential, is this plausible? Is anyone else doing it? You need to be able to check the narrative given against your history and competitive set, and determine if it makes sense or if the story is flawed.
- The narrative holds up under scrutiny
Does the appraiser’s story withstand scrutiny? There are three main tests you can use: history, experience, and common sense. In history, you are looking at what else is happening in your market or with your company. Have any other companies in your space lived the narrative your appraiser presents? In terms of experience, if you have gone through a business valuation before, are there similarities and can you recall the problems you ran into in practice? And with common sense, it’s simple – does the story match reality or have you been given a fantasy?
If at the end of the valuation process, you truly understand how the appraiser reached the conclusion, your valuation likely has a strong and defendable narrative. If not, then consider an alternate source for valuation work in the future. A good valuation tells a story, and as a business owner you want your story to be told clearly and correctly.