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Valuation Fundamentals REASON FOR VALUATION: A good rule of thumb is: if your valuation is going to be scrutinized by someone/ somebody other than you, you probably need a formal valuation. For example, if you need a valuation for a partner issue which may end up in litigation, you need a formal valuation. If a third party outside your business is going to contest the transaction, get a formal valuation. TYPE OF VALUE: Formal valuations are
generally focused on the price of the shares of your company and often do not take into account what the business might be worth on the open market. Informal valuations generally are concerned with market value and marketability of the business and try to answer the question: what might a buyer pay you for your business?
Buyers Determine Value If you are looking to sell your business, we always suggest you start with an informal valuation to determine a fair and reasonable expected target price for the company. However, it is important to remember buyers are who really deter58
mine the price of businesses for sale, not the seller or your advisor. A case in point: a few years ago, we were engaged by a client to sell his multilocation chain of imaging equipment dealerships. Our client believed his company was worth a certain price (for confidentiality purposes, we cannot divulge the exact price). We did our informal valuation and told our client we thought the business was worth 20% more than he thought…which he did not believe. We went to market without a price and ended up creating a bit of a bidding war between two buyers who both bid 35% more than the seller expected for the business. End of the day, the buyers of the business were the ones who decided the price for the company, not us or our client. As you can see, there are more to business valuations than just asking someone for a number. Before you can determine the value of your business, it is critical to understand the reason for the valuation and the best expert to perform the task for you. In next month’s article, we will look at specific valuation methodologies, espe-
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cially those used to value equipment dealers and supplies wholesalers and resellers. In the November article, we will discuss multiples in business valuations…and why they usually do not work. If you have specific questions about valuations or how to value your own business, we are happy to answer them for you. ✦ Jim Zipursky is the Managing Director of CFA-MidWest, an investment bank serving the middle market. Jim is a registered representative of Silver Oak Securities, Inc., member FINRA/SIPC. For more information visit www.cfaw.com/omaha. Follow Jim on Twitter (@jazcfane) for articles and information about M&A. For more information about Exit Strategies or Selling Your Business, feel free to contact Jim at (402) 330-2160 or firstname.lastname@example.org.
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