Why a Valuation is Essential for Reducing Risk

Posted by Rock LaManna

 

Why is a valuation important when it comes to selling your business? Let’s look beyond the numbers, folks. Let’s talk about sleepless nights and all-out anxiety for you, the seller. If you want to keep the stress level down, then a valuation can be a great tool.

There are times when my conversations with clients remind me how emotional and difficult selling a business can be. I’ve been through the process myself enough to understand their anxiety.  But as a business broker, I’m a bit more removed than I was as an owner.

I remind myself every day when I’m dealing with clients that I can’t ever take the emotional nature of this business for granted. No matter how many times a deal comes down to numbers, it’s still the human condition that determines whether a deal closes or not.

A client shared some thoughts with me recently that really drove that notion home.  Let’s break some of his statements/questions down, and address why a business valuation can help relieve some of the typical anxieties.

“It’s not that I’m not ready to sell. (The question) is what am I risking by selling now versus in a few years?”

I was once refinancing my home mortgage, and I asked the mortgage broker what he thought would be the best time to lock in a rate.  The marketplace was hot and cold, and rates would spike one day and drop the next.

His statement was simple: “Pick a number, and when you hit it, do the deal.”

The advice was spot-on. There was as great a chance of interest rates spiking as there was of them falling. I was entirely at the mercy of the marketplace the longer I waited to lock that rate.

On the other hand, if I found a good rate, I could lock-in and move on.  I wound up picking a number, and then refinancing when I hit it. I didn’t check the rates throughout the process, and everything fell into place.

My seller doesn’t have his number. He is plagued with the question of whether he should sell now, or wait for greener (perhaps) pastures. I have no answer for him, other than he will lie in bed awake every night, wondering if he should sell or not.

With a valuation, he would see if he had his number - or at least, see what numbers were even possible. It wouldn’t be a guarantee, but it would alleviate some of this great unknown he was mired in. Then anxiety would turn into action.

“I continue to fight for the best scenario for me, my family and my business.”

That is indeed the good fight, and we all wage it every day.  But what are your “best scenario” decisions based upon?
               
Are they based on the spectacular retirement dreams of riches, resorts, and Rolls-Royces? Or are they based on happiness? Time with your family? Providing your business with an opportunity to flourish on its own?

If it sounds like I’m urging you to sell now, that’s not true. What I’m suggesting you do is not base your decisions upon pie-in-the-sky projections and dreams.  The Stones sang it best:

You can’t always get what you wanted.
But sometimes, you just might find, you get what you need.

With a valuation, you’re one step closer to finding out what you need. With a number,  you can estimate what your retirement will look like, how much your business will have in the bank to continue on, and what type of lifestyle you’ll be able to lead.

And that’s when you can sit down with your family and say, “I’ve fought the good fight, but now the fighting is done. Now is the time to enjoy and live with what we’ve got. And it will be more than good enough.”

“It’s all about risk, right?”

It's all about risk

That statement is so true. It is all about risk. But too often we think about what we risk in terms of loss (money) instead of what we gain (time, family, health).

Risk is with us, no matter what.  No amount of research can eliminate it entirely. It’s part of the human condition, and the people who win are those who know how to manage risk, rather than have it manage them.

A valuation doesn’t always present you with a black-and-white decision. It will, however, help make your choice easier. And if there’s one thing a business owner needs when pondering whether or not to sell a business, it’s how to make this all-important decision easier.

Click here to find out what your business is really worth

 

Topics: Business Valuation, M&A