Business Valuation Anxiety
Nearly every business owner has investments and/or retirement accounts in the stock market. Regularly a statement comes that indicates the value of all of the investments. Imagine if you work all of your life saving and never knowing what the value of your investments are until you retire. That is what is regularly happening in small business. The largest investment that small business owners typically own is the business itself yet they have little to no idea what the business is worth to someone else. They perceive to know based on the amount of blood, sweat, and tears that they have put into the company over the years or rely on hearsay of another business owner’s sale price. The owner wants to be paid for the personal cost of business ownership: the games that they missed for the late nights they endured, the risks they took, the strains on the marriage, and the other sacrifices that have an emotional cost but little financial bearing on value. According to a recent article in Forbes, valuation gaps are the leading cause of deals not consummating. In the same article the 2014 Pepperdine Private Capital Markets estimate that value differences and unreasonable seller or buyer demands are over 40% of ALL causes why deals die. Baby Boomers own a disproportionate number of the private businesses in America. They are turning 65 or reaching the “normal” retirement age at a rate of nearly 10,000 per day and they will need to transfer the value in order to retire. How can you even consider retiring if you do not know how much you have available to retire?
When going to the doctor as much as 20 percent of the population suffers from “white coat syndrome,” in which blood pressure surges when measured in the doctor’s office due to the fear of a bad diagnosis. Analogously, the same is true in when planning the transition of a business. Fear is aroused in the absence of any sense of what to do. It the person’s way of coping which leads to delay and avoidance. When the time does come to exit the business, the options have been minimized. In lieu of an appraisal, often the seller’s emotional justification is the catalyst of the value. Although there is an emotional component to every sale, it pales in comparison to the analytical price justification that every buyer and his/her team will undertake to ensure a good deal.
There are many options available to achieve the value out of the business when the time does come. However, the first step is to establish the value today and then measure it on a regular basis. Business valuation anxiety is treatable. Knowing the value of your greatest asset enables you to plan, pivot, and posture your legacy.
Ed Mysogland, CVA, CMEA, SBA
Ed is the Managing Partner of Indiana Business Advisors where he serves as the full-time appraiser of businesses considering a sale. He is also president of Meridian Valuations, which is a multi-discipline appraisal firm specializing in sale, lending/compliance, and exit support services.
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