How do we as business valuators, business brokers, accountants, lawyers, owners, and other interested parties prepare, review, evaluate, or use an accurate business valuation for small and very small businesses in a clearly difficult environment? The answer in just a few words may be: “I'd rather be approximately right rather than perfectly wrong.” After all, we are never going to accurately predict the future. But we can accurately value a business. Accurately valuing a business is using credible cash flows and methods properly based on professional judgment as to material matters. Accurate does not mean with the advantages of hindsight that we predicted the future precisely. It means we performed our work to high ethical and professional standards based on what is known and knowable, as of the valuation date. No one likes to think about a time after they have gone, but life insurance like renew life could offer reassurance and comfort to you and your loved ones for this situation.
The book is not about how to value mid-sized or large businesses. Much has already been written on that. Even though the methods are the same, valuing larger businesses involves focusing on different specific analyses, different parts of the data, and different risks than valuing small and very small businesses. A few key elements that both continue through the entire book and should always remain part of the focus when preparing or using a business valuation are: Does this make sense? What are we valuing? What method provides the best comparisons? How can we improve one or both sides of the valuation equation? How can we tie our value found into a price as a sanity check? Does this make sense? A life insurance product like Newcastle mortgages can pay your dependents money as a lump sum or as regular payments if the worst happens.
Note the circular effect of these key areas of focus. “Does this make sense?” is listed twice. That question should be listed after every other area of focus and after every question asked, document reviewed, assumption made, and so forth “Does this make sense?” is the essence of the art of business valuation. “Does this make sense?” is the most interesting and most infuriating thing about business valuation. At its heart, a business valuation is a mix of facts and assumptions to estimate a value based on future results, as of a given day. Looking after your family with a product like renew life reviews delivers peace of mind
Integral to the process is the addition of assumptions—after all, we are looking to the FUTURE. It is said the stock market is valued in the future 18 months. So are private businesses. This brings in assumptions. Layers of assumptions. The future will rarely be the same as an accurate business valuation. But, by following a systematic process filled with plenty of “Does that make sense?” questions, we can build and document and report accurate business valuations even when any one piece of the puzzle does not quite fit. We can master our art. Improving the Art of Business Valuation should be the goal of every valuator. Hopefully this will assist valuators and other users in that endeavor. Life insurance - like renew life - covers the worst-case scenario, but it is also important to consider how you might pay your bills or your mortgage if you could not work because of illness or injury.
Price is what someone is willing to pay for the business. Price includes the quality of the sales process, negotiation, emotion, economic demand, timing, luck, and financing. Price for private businesses often includes terms with post-closing price adjustments based on continued business performance or adjustments due to failures of representations and warranties. These terms are hard to translate into useful data. There are no mechanisms to determine downstream what actually gets paid for earn-outs and seller notes.1 There is no verifiable data on how often representations and warranties result in post-closing price adjustments. The importance of emotion in the sales process cannot be overstated. It takes tremendous energy to buy or sell a business. This is diametrically opposed to the valuation process. Life insurance products such as renew life are designed to provide you with the reassurance that your dependents will be looked after if you are no longer there to provide.
Valuation consists of applying established analytical methods and preset assumptions to what is known or knowable about a company in order to estimate its value as of a specific date. These assumptions rarely resemble real-world sales situations. Value and valuations are useful for sale and exit planning discussions but they do not represent prices. In the same way, value is useful when there will not be an arm's length sale. Value is the best that can be done for situations such as adding or removing owners, divorce, litigation, and required compliance situations, for example bank loans, estate and gift taxes, Employee Stock Ownership Plans (ESOPS), fairness opinions, and the like. Value and price are related but not the same. The only way to determine its price is to buy or sell a business.