Of what value is a Valuation?
Most small business owners do not see any value in paying for a formal appraisal of their business. Business owners have a price in mind when they get ready to sell, & usually this price is not based on a rigorous analysis of the earning power of the business. In my opinion this is a big mistake. There are only 3 potential outcomes when you do a valuation… and all of them are positive.
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The price you had in mind is lower than the valuation -
In this situation, the value is clear. The valuation prevents you from leaving money on the table. Lets say you were willing to sell for $2.5M, and the valuation comes in at $3M. Well, that $5000 valuation you conducted just gave you an extra $500,000. A 99 times return on your money.
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The price you had in mind is very close to the valuation -
In this case the valuation gives you confidence in your selling price. At first glance this is not a big value, but seller remorse often kicks in after a sale. I have yet to meet a seller who wonders whether they could have negotiated a better selling price. Its natural human tendency. Even if you do a valuation, you will still kick yourself and wonder if you could have gotten another $20,000… but just not that hard.
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The price you have in mind is much higher than the valuation -
Often times sellers do not realize how valuable this outcome is. First it prevents you from listing your business at an unreasonable price. You will not attract knowledgeable buyers at this price. Even if a buyer were to make an offer, s/he could never find financing at this price. Either outcome (not having buyers, or having buyer after buyer fail to raise financing) is frustrating and painful for the seller. Knowing beforehand that your expectations are unreasonable gives you the opportunity to change your expectations or to work on your business before you choose to list it.
