How to Determine a Realistic Value for Your Client’s (or Your Own) Business

WealthManagement.com
Nov 06, 2019

Martin M. Shenkman, Michael Richmond 

Knowledge of a company’s true value is essential for business owners and their
advisors to assure that the client will receive reasonable value in a transaction, to
prepare clients on what to do if they’re approached by a prospective buyer or even to
help them develop a plan if they are considering selling their business in the near
future.

In all these situations, owners must know their business’s true value to determine
their next move. How will the sale be structured? Is the proposed price a reasonable
price or just a shot to see if the owner might grab it? Although valuation is so critical
to know, most business owners are at a loss when it comes to determining it. The
danger is that such owners may begin pursuing a transaction with a third party
without consulting their advisors, and that could be problematic, especially if the
owner has inappropriate assumptions of the business’s value.

Unfortunately, some owners will underestimate their business and its value, which
could cause them to leave a lot of money on the table and, ultimately, come up short
in a future transaction. Conversely, some owners overestimate the value of their
business causing them to be left empty-handed as they turn down a reasonable price
for their business because they mistakenly think it’s worth much more. The latter
situation can be especially problematic for an owner with no family heirs to the
business or who has a health challenge or other issue that makes a sale important to
consummate soon.

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