07 Jan Why Business Valuations Do Not Match Entrepreneur Expectations
Many times entrepreneurs believe their companies are worth meaningfully more than what the market will bear. But the reality is that a company is only worth what a buyer is willing to pay. In some cases, however, a business might be worth more than what an owner thinks simply because he or she is focused on running the company and not conducting research on the overall market. Still, the norm seems to be that companies are worth less – pre-valuation – than entrepreneurs think they are.
A study of 107 corporate attorneys found that every one of them has worked with a company where the entrepreneurs had somewhat grandiose ideas of what their company was worth. These business owners are not being objective usually because of the personal and psychological attachment to their companies.
According to Peter Previte, a leading authority on valuation and vice president at MidCap Advisors, a middle-market investment banking firm, “Different scenarios have their own issues when it comes to valuation, and often entrepreneurs are not attuned to the limitations they are confronting. For example, early-stage entrepreneurs might be getting traction, but they haven’t really proven their business model yet. One large customer is great, but they must close more deals in the pipeline to determine a realistic closure rate and the potential of the business. The result will be a much higher valuation.”
Long-running family businesses are another example of where the owners think the company is worth more than what the formal valuation determines. Many of these family businesses have become quite successful and have enabled the family to enjoy a nice lifestyle. The family often has a very strong emotional attachment to the business, which makes the owners think the company is worth more than it really is. A formal valuation is essential in these situations to make sure everyone is on the same page.
“The value of an entrepreneur’s business is influenced by many factors. Recognizing which factors can be influenced and which will provide the greatest increase to the transactional value of their companies is empowering,” says Previte. “Whatever stage or situation the business is in, a proper valuation is extremely important. Whether the goal is to raise capital for growth or preparing for a sale, knowing the reasonable range of their companies’ values will facilitate negotiations and increase the chance for a successful transaction.”
There is a lot of “power” in valuations. This is why it is so important to work with investment bankers to help you determine the appropriate valuation for a company.
Are you curious about how sellable your company is and what you would need to tweak to sell it when you’re ready? Then it’s time to get your Value Builder Score via the questionnaire on our website. It takes about thirteen minutes and your responses are kept confidential.