Wednesday, June 12, 2024

Get Your Business Valuation Prior to Sale Negotiations


Oftentimes, business owners go down the path of selling their business ill-equipped. Perhaps the owner has built a thriving business and rightfully pats himself on the back for his achievements, but what has he truly built. More importantly, what is its precise value to a potential buyer? In other words, what is the price a buyer should be willing to pay to acquire the business? The exact value is elusive and complicated to determine. When a business owner gets even the slightest hint of an interest in exploring sale options, he should engage a valuation expert to get a thorough, unbiased determination of value.

Who is the valuation expert? Customarily it would be a Certified Public Accountant (CPA) that has specialized training in business valuations like the Accredited in Business Valuation (ABV) designation. For ease of reference, let’s call these professionals ABV CPAs.  These professionals are often engaged to provide a thorough valuation report. But, equally important, they are often called upon to defend their valuations when, for example, the client is audited by taxing authorities or when acting as expert witnesses in court proceedings that hinge on business valuations. 

Timing is critical. Expect that the valuation process will take at least a month from the time of engagement, assuming the business owner is able to quickly provide all the requested substantiating information for the ABV CPA to review. That’s why it’s important that the process starts when the first hint of interest in selling arises. 

Might your own CPA provide the valuation? Maybe. If you have a longstanding relationship with a CPA, feel free to ask about his or her ability to provide a valuation similar to that of an ABV CPA. However, more often than not, the existing CPA feels comfortable handing off that work to the ABV CPA both because of the additional expertise provided and the fact that the engagement with the ABV CPA is limited in scope – meaning the current CPA is unlikely to lose your long-held business. 

What does early engagement of the ABV CPA provide? Not only does the business valuation provide the seller with a more thorough understanding of the value of the business for sale negotiations, but it can also provide insight into important business changes the owner can implement to increase the value of the business prior to sale. It provides an opportunity for the owner to begin to cut out the fluff to showcase a more accurate income stream from operations.  Maybe the owner or his family working in the business should have their salary modified to reflect reasonable wages. Maybe company expenses should begin excluding owner –call it, “grey area” – expenses that are often liberally deducted in small businesses and affect the bottom-line value of the company. Maybe it helps to identify and adjust budget items to match industry expense expectations more closely. The bottom line is that it can provide the tools to help the owner understand how to drive the business valuation higher over time. 

A business valuation will not necessarily align with the final selling price of the business. This is a common occurrence when predictions meet the realities of the marketplace. Nevertheless, it provides the seller with a more accurate and honest assessment of the business’s value. The seller should also understand that a savvy buyer will often go through a similar process with his or her own ABV CPA to determine the offer price. By starting the process early, the owner puts himself in the best possible position to begin negotiations with any potential buyer, armed with an understanding of valuation methodology as well as the specific valuation for his business in his back pocket. 

Beau Ruff, a licensed attorney and certified financial planner, is the director of planning at Cornerstone Wealth Strategies in Kennewick, WA.


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