Chapter 6 - Valuing the Business
Valuing a business is part of our everyday job as we obviously need to come up with a price to go to market and then set the business Sellers' expectations as far as what they are likely to achieve. When selling businesses, the basic premise is that the business is really only worth what someone is willing to pay for it of course. There are other reasons for valuing a business like divorce, partner buyouts, debt financing, etc. but we will focus on what a business might sell for and how the deal might be structured as generally that is what most business owners are curious about. Business valuation can be one of the most misunderstood areas of the process in our experience. Business owners tend to have all kinds of ideas about what their business is worth when in fact the simple premise for most (non-asset-based) business sales is that a Buyer is buying the future cash flow discounted by a % which takes into account risk, the time value on money and expected ROI. Unlike accounting which is mostly mathematical and rules-based, business valuation tends to be 60% like accounting and 40% art or subjective. So there is an aspect that takes technical expertise to navigate and a significant portion which is opinion based.
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