Valuation

What is your business really worth to a buyer?

By Rick Rohac, Business Broker and M&A Advisor

Almost every owner I sit down with has a number in mind. Sometimes it comes from a friend who sold, sometimes from a rule of thumb heard at a trade show, and sometimes it's simply the amount needed to retire comfortably. I understand where the number comes from. The trouble is that a buyer doesn't care about any of those things.

A buyer is buying the future, not the past

You see the years you put in, the slow seasons you survived, the customers you won one handshake at a time. A buyer sees a stream of future cash flow and the risk attached to it. The more confident they are that the profits will keep coming after you leave, the more they will pay. The less confident, the more they will discount, or walk away.

What actually moves the price

• Clean, believable financials. If the books need a long explanation, the buyer will assume the worst.
• Earnings that don't depend on you. If you are the only one who knows the customers and the pricing, the buyer is really buying a job, and they will price it that way.
• A spread-out customer base. One customer carrying a big share of sales is a risk every buyer will notice.
• A trend, not a snapshot. Three steady or rising years tell a better story than one great year.
• Things a buyer can see and count. Contracts, recurring work, trained staff and equipment in good order all add confidence.

Closing the gap

If your number and the market's number are far apart, you have two honest choices: adjust the expectation, or spend a year or two fixing what holds the value down. Both are fine decisions. What doesn't work is going to market with a price no buyer will support. The listing goes stale, and a stale listing becomes harder to sell at any price.

That's why I always start with a realistic valuation before anything goes to market. It's not the most exciting conversation, but it's the one that gets deals closed.