Many business owners do not know their company value nor understand how that value can change. In every case, the value of a business is a range of values.
Why is this so? A valuation specialist determines a range of values using known facts and reasonable assumptions. For instance, a basketball in the hands of LeBron James is worth more than a basketball in my hands. That being said, one person may see more value in LeBron’s basketball and be willing to pay more for it than another.
Example: LeBron James and Basketball
The example above signifies that LeBron’s basketball represents a range of values. Value depends on a willing seller and a willing buyer. This is known as fair market value. While the seller wants the highest value, a buyer wants the best value or the lowest value. In the case of a business, the selling price can be any amount to which both parties agree on.
Example: Business Acquisition
For example, we recently worked with a company that sold for $2.5 million. Unbeknownst to the seller, it was worth far more than that. When the buyer approached Peak Business Valuation, a business appraiser in Utah, to value the company, the range of value was between $5.0 – $6.0 million. Had the seller performed due diligence prior he would have realized a higher value for his business.
Whenever a business owner is planning an exit strategy they should consider the range of values that each strategy will give them. A credible valuation can greatly assist with this. There are several values for a business, but we will consider three:
1. Liquidation Value
- Represents the lowest value within the range
- For instance, if you file for bankruptcy your assets are sold to cover the liabilities of the company, regardless of the fair market value of that asset
2. Fair Market Value
- Represents a reasonable value between liquidation and investment value within the range
- For example, purchasing a business or the ownership interest of a partner will result in the fair market value
3. Investment Value
- Represents the highest value within the range
- For instance, a strategic buyer is looking for synergy and is willing to pay a higher price than the fair market value of a business
Again, valuation is ultimately a range of values.
There are several value drivers that impact a valuation. Each of these can be valued, but the worth of each may be different for each buyer. These include but are not limited to; industry position, growth trends, the reputation of the business, cash flows, profitability, customer relationships, economies of scale, financial performance, human capital, technology, strategic vision, marketing strategy, etc.
As a business owner, it is important to understand the range of values for your company and how you can change these values to meet your business and personal financial goals. This includes when you are planning your exit strategy, as well as when you are annually reviewing your business plan.
We at Peak Business Valuation would love to help you understand the value of your company and how you can increase it. We welcome any questions you have, feel free to reach out by email or through a phone call.