Because business valuations are so subjective, can't they be manipulated to justify any value that the appraiser and business owner want to arrive at?
There are definitely aspects of a business valuation which are subjective, and uncertified business appraisers have been known to abuse this fact. For this reason it is important to confirm that your business appraiser is certified by a respected organization such as the Institute of Business Appraisers (IBA) and is in good standing with this organization. The rigorous IBA valuation training and framework is widely respected in the M&A industry, incorporates sound financial theory, and is backed up by empirical data. Each valuation that Rua Associates’ certified valuation partners generate is arrived at after extensive financial analysis and the utilization of four different valuation methodologies. The values from these various methodologies are then weighted and blended into a final business valuation number, so that anomalies and outliers in the data set are smoothed out. A business valuation, when done correctly, is not voodoo pseudoscience and our financial analyst and advisors are always happy to explain to clients the rationale behind each assumption and method that we and our valuation partners use.
I'm planning to sell really soon. Why not just bring my company to market?
In addition to providing a sound valuation, our Proven Process includes three other important components that lend credibility to the valuation. The first is a Sellability Score, which is a powerful tool for assessing the strengths and weaknesses of each business relative to industry benchmarks. Next is a Market Test. Using a blind overview of the company that obscures the company’s identity, Rua reaches out to active individual buyers and private equity groups who can, based on the limited information we provide them with, give us a ballpark estimate of what they would consider paying for the company (if it were to go to market) and how they might structure the deal. Lastly, we go to banks that we have relationships with to see how they would most likely structure the transaction and if they are in agreement on the valuation.
I'm not planning on selling my business for a couple of years yet. I'll wait until then to get a valuation.
The reason that you check your 401K's value more than once every five years is so that you can determine whether or not your are on track to reach your personal and financial goals. For most business owners, the sale of their company will provide the majority of their retirement funds. It stands to reason then, that a business owner should be monitoring the value of this asset with some level of frequency. A lesser known fact is that a valuation can be an excellent management decision-making tool and also useful for making strategic decisions. Should you invest in attracting a more diverse client base (which lowers your risk, and thereby cost of capital) or improve your margins by investing in that machine you've been thinking about buying? A valuation allows you to plug in the numbers and see how different decisions will affect the probable value of your company.