The good folks at the Northwest Arkansas Business Journal published my latest guest commentary this week [subscription required]. It was part of the “Northwest Arkansas’ Largest Private Companies” issue. Here is the article in its entirety. Enjoy!
I’m a sucker for a good list, and the annual round up of Arkansas’ Largest Private Companies is one of my favorites. There are few surprises at the top, with companies like Stephens Inc. and Simmons Foods ranking high every year. But as an M&A broker who analyzes business value on a daily basis, I’d be curious to see these companies listed based on a different metric: What they’re worth.
Getting data on privately-held companies can be difficult to impossible for the obvious reason that they are, well, private. Unlike their publicly-traded counterparts, there is no database where we can access information with financial details about private companies that determine value.
While it may be a matter of curiosity what someone else’s business is worth, there’s a hard truth about business valuation in general: Most business owners have no idea what a buyer would pay for their business.
A business valuation is something that many business owners think of as unnecessary unless and until the time comes to sell. But a business valuation can be a useful tool for both short and long-term business planning. It can even be the dose of reality that nudges you to make decisions about your business that you’ve put off too long.
I’ve met several owners who have their business valued as part of the annual business review process with shareholders. Here are three more good reasons to get a business valuation:
1. Business planning
A lot of business owners tend to get fixated on growth, the pursuit of which often revolves around metrics like sales revenue or gross margins. But growth does not guarantee profitability, nor does it automatically increase the value of your business.
Going through the process of having your business valued can be an eye-opening experience. It teaches you to look at your business the way a buyer would, and uncovers what it is about your business that either drives its value up, or brings it down.
2. Retirement planning
Business owners take a lot of risk by having much of their net worth — typically 65 to 85 percent — invested in one asset: their business. These same owners may also expect to fund all or part of their retirement with the proceeds from the sale of their business.
Imagine your disappointment if you thought your business was worth $3 million dollars, only to find it’s worth half that amount when the time comes to sell and retire. When it comes to retirement, your personal goals may be the first thing you consider. The next should be what your business is worth, and how that amount will — or will not — support your underlying goals for yourself and your business when you’re no longer at the helm.
3. Buy/Sell agreements
If you’re in business with a partner and haven’t had your attorney draw up a Buy/Sell Agreement then you need to do so. Immediately! A Buy/Sell Agreement is the equivalent of a will for business owners, and specifies what would happen to the business in the event that some unforeseen disaster befalls one of the partners. Part of this exercise is for you and your partners to agree on what the business is worth. Rather than make your best guess, this is the perfect time to get an opinion of value from a professional.
The type of business valuation you need will depend on the reason. One business can have many different values depending on who’s asking and why. If you need a certified report, expect to pay at least $3,000 to $5,000. For many business owners, a non-certified opinion of market value from an M&A professional can be both affordable as well as entirely adequate for making internal decisions.
It’s one thing to know the size of a company, but it’s another to know what it’s worth. If you’re unsure about the value of your largest asset, it may be time to find out.
Hi Barbara, great article. One thing of note, however, is that there are subscription-based databases where we can access information with financial details about private companies that have been sold. These are two that our firm subscribes to: Pratt’s Stats and BizComps. They are extremely valuable to us when we do valuations for our clients. We also use our own database, which contains thousands of businesses that we’ve sold in our market area.
Rose –
Yes! Good point. There are subscription-based services where you can get aggregate data from done deals. I use the ones you mentioned, as well as PeerComps, which gets its data from transactions that involved an SBA guaranteed loan.
Thanks for the clarification!
–Barbara