Do Business Owners “Know” the Value of Their Businesses?

Dangers of Thinking of a "Walk-Away Number" as the Value

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Do business owners “know” the values of their businesses? And do they need help if and when they think about selling, either unexpectedly or as part of a plan?

Questions at a Seminar

Let me set the stage for a most interesting and important question raised to me during a recent seminar at which I was a speaker.  The audience was made up of closely held and family business owners.  The panelists included an investment banker, a business attorney, a financial planner and myself as the token representative of the business appraisal world.

The panel was asked by the moderator to address each of the following questions:

  • Why are business owners you’re working with considering selling their business?
  • How do business owners go about gaining a real understanding of the value of their business?
  • When should a business owner consider or at least begin thinking about selling?
  • What are the two or three things a business owner should do first once they decide they want to seriously pursue the possible sale of their business?

I addressed the question of the value of businesses during the seminar and contributed responses to other questions.  I prefaced my comments about value in that session:

What you as a business owner think about the value of your business is irrelevant.

  • If you think you have a number in your head, that’s what you have, an irrelevant number in your head.  It cannot help you in any way [see below].
  • If you want to make gifts to your family or to a charity, to establish an ESOP, or to engage in transactions with your buy-sell agreement, the only opinion of value that will matter is mine or that of another qualified and experienced business appraiser.
  • If you want to sell your business, the only opinions of value that matter are those of buyers of capacity.

So what you think about the value of your business doesn’t matter.

The Most Important Question Asked

There was an active Q&A session following our comments and I was asked a number of questions directly.  The most memorable question from a business owner went like this:

Chris, business owners are pretty smart, and we know more about our businesses than anyone else.  We know about valuation multiples because we talk to our friends who have sold their businesses.

And I have a walk-away number in my mind for my business.  That number is, literally, what I would walk away with after paying all deal expenses and taxes and everything else.  So if someone comes to me and offers me my walk-away number, why shouldn’t I take it?  Isn’t all this stuff you guys have been talking about this morning just superfluous?

Wow!  What a question!  It is, after all, one of the top questions in the minds of most business owners.  I wanted to respond thoughtfully.  I said, with a couple of parenthetical comments:

First, let me agree with you that most business owners know more about their businesses than anyone else outside of the businesses.  But let’s talk briefly about your idea of a ‘walk-away number.’

This gentleman’s walk-away number would apparently enable him to do whatever he wanted to do in life, and it was something he had thought about.  But I went on.

Market multiples are always talked about in ranges, like 5x to 7x EBITDA, but we almost never know what EBITDA is being multiplied.

And there are always transactions above and below the so-called ‘country club’ multiple ranges.  It is useful to know more specifically what a business might be worth than some generic range.

What if your business is worth more, and perhaps a good bit more, than your walk-away number?  Wouldn’t you rather give the rest to your family, or to your favorite charities, or to something else?  Or would you rather make that gift to your buyer, a total stranger?

So I think that business owners need to think about the things we have been talking about and they need to get help when an unexpected offer comes along or when they think they are ready to sell their businesses.

There was, of course, a big round of applause following my answer!  Well, not really, but I do believe that it caused the owners present to think about the question.

The Hidden Danger of a “Walk-Away Number”

There is another, not so obvious danger with a so-called walk-away number in a business owner’s mind.  An unexpected contact or approach from a prospective buyer often creates the potential for pursuing a transaction.

What if the walk-away number in a business owner’s mind is simply too high and is unrealistic?  What if the finally offered price was actually a very good price for the company, regardless of the owner’s walk-away number?  In all likelihood, there will be no transaction.

But that very good price might not be available again or in the foreseeable future.

As I see it, there are upside and downside dangers to setting  firm walk-away numbers for business owners:

  • Upside:  If an owner sells at a walk-away number that is low in the then-current market for his company, he is making a gift of the excess value to the likely unknown purchaser, rather than to his family, favorite charities, or other beneficial uses of that value.
  • Downside:  Firm walk-away numbers may blind business owners to realistic, even very good values for their businesses, and preclude transactions that likely should occur.

Concluding Thoughts

In conclusion, business owners should consider the answers to the questions posed at the outset of this post.

  • Do business owners “know” the values of their businesses?  In my experience, the answer is no, and even if they do, their answers are irrelevant.
  • Do business owners need help if and when they think about selling, either unexpectedly or as part of a plan?  Yes.

They should get appropriate help along the way as they work to manage the wealth in their businesses.  This is a major thesis of my book, Unlocking Private Company Wealth.

Critically, when an unexpected offer comes along that could put their companies into play, business owners should enlist knowledgeable transactional assistance.  There is simply too much at stake not to have the best possible team working for you when you sell your most important and most valuable asset.

As always, please give me a call (901-685-2120) or email if you have questions or would like to address any valuation-related issue in confidence.

In the meantime, be well!

Chris

Reminder

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Valuation is important for business owners for many reasons.  One of these reasons is for the operation of buy-sell agreements.  If you are thinking about your buy-sell agreement (and you should be), then take a look at Buy-Sell Agreements for Baby Boomer Business Owners, my Kindle book on the topic.

I’ve priced it at $2.99 so you won’t have to think about the expense.  So click on the image of the book.  You will be taken to Amazon.  Then buy the book.  Don’t be mislead by the price.  It is a full-length book.  If you like it, as most readers have, please take a few minutes and review the book on Amazon!

Additionally, my two most recent books are available in an Ownership Transition Bundle.  The bundle, priced at $35 plus s/h, has been attractive to many business owners, appraisers, and attorneys.

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Please note: I reserve the right to delete comments that are offensive or off-topic.

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2 thoughts on “Do Business Owners “Know” the Value of Their Businesses?

  1. Chris Mercer presents his information in language that can help owners better understand the real value of their business. And for that, I give him a big round of applause.