Once in a while, the conversation between a CEDF business advisor and a client turns to the possibility of the borrower selling the business. It’s surprising how unfamiliar many small business owners are with the standard approaches for valuing a company in their industry, or any closely-held company for that matter.
Admittedly the subject is complicated, and while there are basic formulas, often individual circumstances can overtake the usefulness of any single customary approach. Probably this is one reason there is a whole industry of business appraisers, although most of their work is confined to “bigger” small businesses.
This article provides a nice tutorial for those who need to get grounded in the realities of valuation. As you can imagine, it’s not unusual for a small business owner to sometimes have an unrealistic idea of how much their operation would bring. In companies where the efforts of the owner are key to the past accomplishments and future success of the enterprise, it can come as a shock as to how little value the office furniture, old equipment, leasehold improvements of a rented space and even the customer list can bring.
A hard look at the realities is important both for personal planning and making short and long term decisions about investment, expansion, and potentially, succession. A talk with your CPA is a good first step toward evaluating the cold truth.
— Frederick Welk
CEDF Business Advisor