June 4, 2012
As I come across entrepreneurs considering transitioning out of their business I am often surprised at what they think their businesses are worth.
I am also rather surprised when entrepreneurs resist retaining a professional (CA, CMA or Chartered Business Valuator) to value their business.
For most people their home will be the single largest asset in on their balance sheet. For successful entrepreneurs it’s highly likely that their largest asset is their business.
This is over simplified, but when purchasing a business that is intended to continue as a going concern a buyer is essentially buying a discounted series of cash flows. They calculate what they think the business will earn on a go forward basis, discount that based on their view of the likelihood (risk) associated with those earnings and then come up with a price.
Now there are often other things that impact the value of a business, not the least of which being the motivations of the buyer. Some of these include:
- cash flows,
- strategic bolt on,
- remove a competitor,
- enter a new market,
- acquire a product or a management team,
- get a job, and
- myriad others.
At the end of the day a business is worth what a buyer is prepared to pay. As baby boomers begin retiring over the next twenty years there is likely going to be a growth in the number of owner-operated businesses coming available for sale.
This spells an opportunity for acquirers of businesses.
In a later post I will talk in more detail about how a business is valued and some of the things buyers and sellers should be considering.