How Can A Business Valuation Help Me Plan My Exit Strategy?

July 2012       Download PDF      Print

When an owner decides to move on - whether motivated by a planned event such as retirement or a new business opportunity, or by an unplanned event such as a health crisis or financial trouble - an accurate business valuation is essential.

When selling your business, you would naturally want to receive a fair price. A professional valuation will provide insight into your company's financial state, market position, and overall strengths and weaknesses - enabling you to establish price expectations and make improvements that could help maximize your profit.

Primed for sale

When enlisting the help of a valuation expert, he or she will prepare your financial statements for buyer scrutiny by making various adjustments to earnings - a process called "normalizing." Your appraiser may remove one-time or discretionary items from your balance sheet and income statements, such as owner-specific and nonrecurring capital expenditures. This will provide prospective buyers with a more accurate picture of your company's potential performance if it were to come under their control.

To enhance your company's perceived value, an appraiser might also advise you to pay down debt, beef up your internal controls or ensure that legal documents are in order. Sometimes, experts suggest more drastic measures, such as cutting staff, freezing expenditures to reduce overhead, implementing accounting practices that increase inventory turnover, or divesting businesses of a poorly performing unit.

Order to business affairs

Even if you aren't planning on selling your company in the near future, a valuation expert can provide you with the information necessary to draft a buy-sell agreement. This agreement provides a plan to follow in the event you or a business partner unexpectedly dies, becomes disabled, or withdraws from the company. An appraiser can name and define your agreement's standard of value and establish a mechanism for determining the value of the company in the future.

The value of your company will affect the tax-related costs of gifting or bequeathing business interests, so if you choose to pass the business to your family or loved ones, a valuation can prevent you from improperly estimating value. Otherwise, your heirs could end up with a sizeable estate tax bill that could force them to sell your company after your death.

Valuation experts use a variety of methods, most of which use some variation of the market multiple - operating cash flow, revenue, or book value - as a benchmark to assess a business's purchase price. Your appraiser will likely perform a complex analysis using several methods that suit your company while balancing quantitative financial techniques with qualitative analysis of general business performance, economic conditions, and your industry's specific circumstance.

Your role in the process

To help your appraiser make a fair and accurate appraisal and to get the most from the engagement, gather all pertinent data and contractual agreements relating to financials, marketing and sales, operations, and products and services. Also, business owners often forget to consider the value of intangible assets -be prepared to provide your appraiser with information on these, as they could be a major contributor to your company's worth.