Business valuation: What’s it worth?

Whether you are planning an exit or
simply want to motivate employees
to drive profit, a business valuation is a key tool that will help you implement a
strategic plan to meet short- and long-term
goals. Simply put, a valuation is an independent appraisal of what a business is worth in
the marketplace. Though a valuation ultimately gives you a number — a worth for
your business — the process of reaching this
value is more art than science. There is no
single value for any business. It depends on
the acquiring party, circumstances in the
market and the dynamics of the business.

This is why relying on an industry “rule of
thumb” is no way to approach a business valuation. “Every business is unique, and that
individuality can increase or decrease a company’s value relative to others in the same
industry,” says Joel Guth, an advisor with Citi
Family Office in Columbus, Ohio.

Smart Business spoke with Guth about
why valuations should be tailored to individual companies and their goals.

Why are business valuations not only an important tool for selling a business but also for exit
planning and carrying out other strategic goals?

There are numerous reasons why you may
need to find out the worth of your business.
The first is obvious: an acquisition or transfer
of ownership. Not only do you need to know
how much the business is worth before selling it, but also acquiring parties will expect
documented proof that the asking price is
fair. Besides selling the business, you may
decide to get a valuation annually and tie
your company’s worth to an employee incentive plan. Finally, a valuation is a critical tool
in exit planning to show you where you are
now, so you can plan where the business
needs to be before you exit.

Explain why a company’s worth may range drastically based on the reason for the valuation.

You must be very specific on why you want
a valuation because an appraiser could provide a range of values depending on what you
are trying to accomplish. For example, if a
family member wishes to acquire the business, you want the lowest possible value to help mitigate some of the tax burden associated with the transfer. However, you want the
highest value possible when selling to a third
party so you can maximize gains. On the
other hand, if the valuation is tied to an incentive program, you want to know the true market value of the company so employees will
understand what the company is worth
today and what they need to do to increase
that value. There is no single value for a business, and you want to tailor the valuation to
the audience and circumstances.

Who should conduct a business valuation?

A certified appraiser who is familiar with
your industry should conduct the business
valuation. If you are selling your company to
a third party, partner with an appraiser who
has experience in the dynamic M&A market.
An appraiser who is not familiar with your
industry may not be knowledgeable in current market prices. With any appraiser, communication is critical to receiving a valuation
that suits your goals and can be used as an
effective business tool. A valuation based on
selling your business to a third party should
not double as a valuation to show employees
the worth of your company as it pertains to
their bonus checks. They may wonder why
the bonus isn’t bigger!

When and how often should an owner get a business valuation?

A valuation is a critical prerequisite to exit
planning, so you should count on getting a
valuation at least three to five years before
you plan to sell or pass on the business. But
again, the ‘when’ question is dependent on
why you need the valuation. When exit planning, a valuation should be tied with a needs
analysis. Decide how much capital is needed
from the business to live comfortably after
you exit. This will determine who you sell to,
what type of valuation is necessary and, if
your business isn’t ripe for the exit, how
much work needs to go into getting financials
in shape before you exit and meet your goals.
Valuation is far more than putting a price tag
on a business. An accurate, customized
worth of your business is a great benchmarking tool and motivator to employees.
Most of all, a realistic picture of your business
today can help you better plan what’s next.

Citi Family Office is a business of
Citigroup Inc., and it provides clients with
access to a broad array of bank and non-bank products and services through various
subsidiaries of Citigroup, Inc.

Citi Family Office is not registered as a
broker-dealer or as an investment advisor.
Brokerage services and/or investment
advice are available to Citi Family Office
clients through Citigroup Global Markets
Inc., member SIPC. All references to Citi
Family Office Financials Professionals
refer to employees of Citibank. N.A. or
Citigroup Global Markets Inc. Some of these
employees are registered representatives of
Smith Barney, a division of Citigroup
Global Markets Inc., that have qualified to
service Citi Family Office clients.

Citigroup Global Markets Inc. and
Citibank, N.A. are affiliated companies
under the common control of Citigroup Inc.

JOEL GUTH is an advisor with Citi Family Office in Columbus,
Ohio, which is a firm that caters to clients whose net worth is at
least $25 million. Reach him at [email protected].