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Precision pays Featured

9:30am EDT March 29, 2006
One of the most difficult aspects of selling a business is coming up with an accurate valuation.

It’s less about the math and more about all the factors and complicated rules that come into play, says Russell Warren, president of The TransAction Group, a mergers and acquisitions advisory firm in Cleveland and a member firm of M&A International Inc.

Warren says that many executives get a false impression from their peers about what the value of their business should be.

“If they talk to friends ... they get what is a fairly common term, a locker room number — ‘I sold my business for $10 million,’” says Warren. “And you really don’t know any details behind that.”

Business owners may assume they should expect to get the same amount for their business, when in reality, each valuation is extremely circumstantial.

Warren offers some important factors to consider when trying to accurately value your business. A valuation should be:

  • Purpose appropriate. “The valuation needs to be performed for a particular purpose in mind,” says Warren. “You can’t just take one valuation and use it for a variety of different uses.”

For example, if it’s a tax-driven purpose such as estate planning or gifting, there are specific rules that must be followed for that to hold up for the purpose intended. But valuations in those cases do not necessarily reflect what a business would be worth in a merger or acquisition or other business transaction.

  • Fresh. The future is important, but the recent past is also of strong interest to a buyer. If circumstances have changed dramatically since the numbers were prepared, that has to be taken into account.

“One thing to keep in mind, the sale process today typically takes six to nine months from the time an adviser is engaged to help you do that, and therefore, things will occur in that six- to nine-month period which may be helpful or may be harmful to getting the highest price,” says Warren. “That’s one reason that we suggest that people that are planning to sell their business look ahead a year and more. It should still be on an uptick if they’re going to get the maximum price.”

  • Real world. Your valuation should reflect today’s market appetite for businesses like yours. If you haven’t taken a good look at the market in some time, you may be surprised at how the value of your business and others has changed.

“We worked with ... an older gentleman that had made a number of acquisitions quite a few years before,” says Warren. “He was kind of mentally stuck in that prior era. We never could really get him to step up to the mark on making an acquisition that reflected today’s market.”

  • Be size-appropriate. “We had one time worked with a printing company that was relatively small, and somebody valued that business and used RR Donnelly as a comparable company because they both do printing — except Donnelly had over a billion dollars in sales and was doing telephone books and has a blue-ribbon group of customers, all these things,” says Warren. “There’s absolutely no relationship to that.”

Regardless of the purpose of your valuation or what type of business you own, Warren recommends contacting a professional firm to assist in the process.

“It’s the starting point for some of the most important decisions that an owner will make,” says Warren, “and therefore, it deserves to be addressed carefully and professionally.”

HOW TO REACH: The TransAction Group, www.transactiongroup.com