How to Determine the Value of the Closely Held Business

The economy may be up, the economy may be down. No matter what the economic status is, business exit planning or business succession planning requires that you understand the true value of the endeavor you have poured your blood, sweat and tears in to for the past (fill in the blank) years.

Over the next several weeks, I’ll be providing practical advice for how to determine a truthful and realistic valuation for your business. As you’ll soon discover, it’s not a process that’s as cut-and-dried as you might think!

First let’s discuss why there are differences between independent valuations and values actually achieved from transactions.

The criteria for valuation methods have become more and more standardized over the last decade or so. Those providing valuations on a professional basis usually are accredited via very rigorous processes. Yet there is often a significant gap between the value an independent valuation will report and the value a business can actually receive if it is sold. Why is this?

The simplest answer is that independent valuation formulas have difficulty quantifying the subjective factors upon which real buyers and real sellers act. Here is an actual example that I worked with:

The business had two equal partners. Over a long period they gradually began to have differing goals and to conflict with one another. Ultimately one was willing to pay a premium to get the other out and end the conflict. However, standard valuation methodology called for discounting the value of the equity bought for reasons of lack of marketability and lack of control.

That’s only one example, I’m sure you could provide me with others! Feel free to do so in the comments.

Stay tuned! Next week, I’ll start delving into concepts for valuation that reflect the real world of buyers and sellers

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Posted in Blog, Selling Your Business