In This Episode
If you’ve owned your business for several years, chances are someone at some point has talked to you about a business valuation. Either someone has asked you directly what your company is worth or the idea of your company’s value has come up in conversation. The question we address in today’s show is just how valuable is a business valuation?
Like many things in life and business the answer is it depends. It depends on what you use the valuation for. If it’s for something like getting key man life insurance or for a buy/sell agreement with your business partner then a valuation can often be helpful. But if it’s something you want to use to sell your business, it might not be as helpful as you might think.
During the show today we shared several stories about valuations and how they were helpful in some instances but when it comes to to actually buying or selling a business, they can be pretty useless. You as a small business owner will likely be speaking with folks who live in a theoretical or hypothetical world which can be really frustrating for those of us who live in the real world.
At the end of the day what a real buyer and real seller care about is how much cash flow does the business provide on a regular and predictable basis. You’ll likely hear terms like Seller Discretionary Earnings (“SDE”) or Owner Discretionary Cash Flow (“ODCF”) which are nothing more than the cash generating ability of your business.
So if you’re contemplating selling your business, you’ll likely have someone suggest that you get a valuation performed on your business. Just take it as a point of reference because at the end of the day the true Fair Market Value for any business requires a willing buyer and a willing seller. Just because someone runs a bunch of numbers through a spreadsheet to come up with a “value” for your business doesn’t mean a deal will get done at that level.
People, Companies and Resources We Mentioned in the Show
- Spardata (https://spardata.com)