Don’t be fooled by your distorted perspective
By: Dave Driscoll
As an owner who has built and grown your business, you know it inside out – the good and the bad – so you should know better than anyone else what your business is worth, right? Unfortunately, no.
Your years of working hard, solving problems, overcoming challenges, and being responsible to your customers and employees have given you an intimate knowledge and intense pride in your company. Simply put, your perspective is skewed because it’s impossible for you to be objective about your business’ value.
This is not a criticism; I certainly understand this phenomenon first hand.
I owned and operated my own company for many years. In my mid-forties, a publicly-held competitor approached me with an interest in buying my company as part of their national expansion strategy. They were pursuing my company! I just knew this was my opportunity to sell my business for big bucks. I felt like the king of the hill, the belle of the ball! During the next few months, they toured my company and I met with their top executives to discuss potential synergies.
I was on top of the world and I was determined not to leave a single penny on the table. After all, they were chasing me, so I had the upper hand. I planned to start high and negotiate to a sale price that reflected the importance of my company to their strategic plan. I would finally cash in on the long hours, the financial risks, and the management headaches I’d endured.
I made many mistakes in that negotiation, but the biggest was that I allowed my emotional attachment to my company to blind me regarding the actual market value of the business. I had no realistic idea of what my company was worth. I estimated my business value based on similar deals within my industry, but none were in the St. Louis region. I thought I was a pretty good negotiator and decided that starting high was a smart strategy.
I was wrong. I started the negotiation with an unrealistically high price and the conversation stopped abruptly. I missed an opportunity to sell for a very nice price. My ego, emotions, biased perspective, and lack of knowledge of the real value of my business added up to mistake after mistake… I learned my lesson.
But I was not alone in my delusions; since then, my years as a business broker have shown me that nearly every business owner has an inflated belief about his/her company’s value. It’s only natural – you’ve spent countless hours nurturing the business and risked everything to support it. It’s your baby! All your time, energy, and sacrifice must be worth a lot.
But unfortunately, that’s not how business value works. The value of any business is determined by existing market conditions including current economic conditions, expectations about the industry’s future, sale prices of similar businesses, owner dependence, and how the business fits into a buyer’s strategic plan. In the end, business value comes down to how much a buyer is realistically willing to pay based on the anticipated return on investment.
Regardless of when you plan to sell your business, you need a firm grasp on the actual value of your business. An independent market valuation of your business is fundamental for planning your future. The only way to determine whether you will eventually be able to support your Life Beyond Business™ is to add the value of your personal assets to an independent valuation of the after-tax value of your business.
If you can live out your dreams on the amount you can (realistically) expect to realize from the sale of your business combined with your other investments…congratulations! If not, take steps today, preferably years before your transition, to increase your business value and reduce the taxes you will owe on the sale. Be sure to consult your tax accountant for considerations specific to your corporate structure (C corp vs. S corp can make a significant impact). Knowledge gives you the power to increase your business value!
Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and succession/exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or (314) 303-5600. www.MetroBusinessAdvisors.com