Why a business evaluation should be a part of every entrepreneur’s financial planning.

By Oliver Kotelnikov

Piggybanks are great. They are a reliable way to safely accumulate funds over time. On the flip side, the maturity value of the piggybank is not fully known, subject to inflation rather than compound interest, and the liquidity event will likely require power tools.

I have embraced Piggybank 2.0 and the advances of modernday financial planning, specifically for the planning component. If the original piggybank delivered on the fundamental promise of financial shelter, stationary security, and linear growth, then a diversified investment portfolio–the upgrade–is a moving vehicle equipped with features that enable the driver to control speed, change direction, pinpoint current location, track progress toward the final destination, and maybe even enjoy some comfort perks along the way.

Few of us today would do business with a bank that didn’t send out monthly statements or offer the option to check account balances on demand. I communicate regularly with financial advisors to ensure the employed investment strategies continue to be in alignment with long-term financial goals.

Finally, it’s hard to imagine leaving to mystery the value of your child’s college fund until the first tuition check comes due or waiting until retirement to find out the exact value of the pension fund you’ve been paying into for years. Entrepreneurs often expend significant resources of time, energy and money to build a successful business. Yet most are steadily approaching retirement or preparing to transition to other ventures without ever taking the time to find out the value of what is frequently their biggest asset. Throughout their career, the average number of fair-market business evaluations a typical entrepreneur receives prior to deciding to exit is astoundingly...zero.

Get The Facts

“It’s not what you don’t know…” This quote goes on to propose that it isn’t the lack of knowledge but making choices of significant consequence based on limited or inaccurate information that does the most damage.

Business owners will routinely supplement an otherwise meticulously balanced and transparent investment portfolio with a rather large X factor--the expected proceeds from the eventual sale of their business. This placeholder value is often endowed with supreme confidence, but too often it represents an assumptive composite of inaccuracies based on incomplete, outdated, unverified and just plain false information. A ballpark approximation by a former accountant, a stated value of what a similar business sold for in the past, standard industry KPI-driven valuation models courtesy of Google, a cost approach to upgrades, and potential future earnings of the business are just a few of the metrics that can generate an inaccurate recommendation of value and set false expectations.

A comprehensive, professional opinion of fair-market value will accomplish the following objectives:

1. Establish a realistic price range of what a business will sell for in the current marketplace. 2. Outline the key factors positively and negatively impacting the present fair-market value of the business. 3. Provide the business owner the opportunity to evaluate the broker’s experience, market knowledge, professional skill set and ability to successfully sell the business for maximum value. 4. Define the scope of the project and determine compatibility between the parties to take the business to market and complete the sale.

The broker should provide a business owner with an update of current market conditions and the commercial-lending environment, optimal time to go to market, and propose a timeline for completing the transaction from listing to sale.

In a recent transaction, a client approached me about selling their business and requested a quick, ballpark figure for the value. I agreed on the condition that the client will also accept an approximate value for their retirement-oriented stock portfolio at vesting. The value of the average stock portfolio in this entrepreneur’s current zip code would be substituted for the value of their actual investments at liquidation and a check remitted for that amount. Phrased in such a way, the proposition sounded absurd.

We proceeded to properly value the business, move to market and achieved a sale quickly. The unique economic climate of challenges and opportunities we find ourselves in today has rendered all generalities obsolete. If success is to be achieved, specifics matter.

As a mergers-and-acquisitions professional, I believe it is our responsibility to adopt a market-based approach when valuing family-owned businesses and privately held companies, and provide my clients with the facts. Whether it is retirement, your children’s education, supporting charitable causes or general estate planning, your post-transactional goals have established, predetermined costs attached to them. The value you can expect to receive for your business at the time of sale deserves to be demystified to ensure you have the financial tools to execute on your long-term vision.

IBA is Pacific Northwest’s premier full-service business brokerage recognized as the regional leader in the sale of family businesses and privately held companies. I welcome the opportunity to provide business owners with a full overview of IBA services and discuss specific exit strategy objectives. Business evaluations are provided to potential clients on a complimentary basis and all communication is held in strict confidence. All of IBA’s fees are performance-based and paid by satisfied customers upon the successful completion of the sale. Please contact me at oliver@ibainc.com for additional information.