How to Find Out What Your Company Is Worth (Without Wasting Your Money)

Whether ready to sell their business or planning for growth, most small business owners make one of two mistakes: They either don’t invest in having their company valued by an expert, or they waste their money on a valuation report that doesn’t fit their purpose.

Let’s look at that second mistake. Smart business owners invest in having their company valued, but many ask for the wrong kind of valuation.

Here’s where things go sideways. The business owner calls their accountant, and they recommend a Fair Market Value valuation. Why? Because accountants play by standards and rules, as they should. Fair Market Value is a standard that is accepted by the American Institute of CPAs, the National Association of Certified Valuation Analysts and even the IRS.

However, Fair Market Value is not a good standard if you are selling your small business or growing to increase value. Here’s the definition of Fair Market Value from the International Glossary if Business Valuation Terms:

“the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts”

Sounds reasonable, right?

The problem is that Fair Market Value makes a lot of assumptions. Here are five of them:

1. A hypothetical buyer and hypothetical seller

You are not hypothetical–you are specific. You have specific goals, limits, and intangibles. For example, you may be willing to sell your company for less, if the buyer is a good home for your employees. This is real-life that must be considered.

The buyer is not hypothetical. You should be considering the best buyers. Should the buyer be a competitor? A synergistic company? A Private Equity Group? An entrepreneur? Each type of buyer will value the company differently.

Don’t think hypothetically. Look at what matters to each and see the value through their eyes. When you do, you begin to identify your highest value and best buyers. You can grow your business based on what matters specifically to them and increase value.

2. Neither party is under any compulsion to buy or sell

This is a necessary assumption for Fair Market Value. If you are arguing value in court, you can’t really assume that the value is different because of a presumed highly motivated buyer or seller.

In real life, however, you can and should. You may know that there are competitors that are driven to make acquisitions of companies like yours, or you may be highly motivated, or willing to wait.

All of this matters and can have a real effect on the actual value paid for the business.

3. Both parties have reasonable knowledge of relevant facts

Do you know something that no one else does? Is that game-changing knowledge? Then don’t value your business pretending that’s not true.

4. Buyer and seller are at arms-length

What if your vendors, suppliers or partners are the best buyers? You should be looking at the value of your business from their perspective.

In the Mergers and Acquisitions Course that I teach at American Management Association, we go as far as defining valuation from an entirely different perspective. We define valuation as:

“An arbitrary calculation of the value of a business, to a prospective buyer, using specific techniques and assumptions–all applied from the perspective of a specific buyer, at a specific point in time”.

That part about a specific buyer is important here. The buyer may not be at arms-length at all.

5. A single and specific deal structure–usually assuming all-cash equivalents

While this assumption is necessary for many situations, in the context of selling a business, you need to look at the real situation–including what you will accept and what is likely to be offered.

If you are only willing to accept an all-cash deal, then the value paid will be very different than if you are willing to have a portion contingent on future performance.

The solution: Understand multiple views of value

To grow in value, or to sell at the best value, you need to understand the many different values that will be assigned to your business–under multiple scenarios and by multiple types of buyers.

Invest your money in an analysis and consultation specifically in the context of a sale. Look at each of the five areas above, and have your advisor walk you through several scenarios with different types of buyers and deal structures. Have them explain the value drivers in each scenario.

If you know what is driving the value of your business, in the eyes of a specific buyer type, you can plan, execute, and position yourself for maximum value.