BUSINESS VALUATION BEFORE A SALE
If the owner(s) is considering a sale of the business, he should allow two to three years for exit planning. As part of that forward plan, the business should be thoroughly valued. The valuation is less about estimating an immediate sale price and more about allowing for meaningful change prior to entering into an M&A process.
Some of the main benefits of this “early valuation” follow:
- Support Broader Planning – Even if you’re not selling soon, a valuation can be used for succession planning, bringing in investors or partners, obtaining financing, estate planning, or shareholder buyouts.
- Employee Empowerment – A business valuation sets a base price for creating an employee stock buy-in or profit-sharing plan. Key employees can be incentivized to increase business value and share in that process. The least complicated plan for employees earning shares is via phantom stock.
- Identify Value Drivers – A valuation shows what contributes most to your business worth, such as recurring revenue, profit margins, lack of customer concentration, management strength, or intellectual property, and what may be reducing its value.
- Improve the business before a sale – If the valuation uncovers weaknesses, you may have months or years to address them. Improving financial reporting, diversifying customers, reducing owner dependence, or increasing profitability can significantly increase value.
- Set Realistic Expectations – Many owners overestimate or underestimate what the business is worth. An objective valuation helps you establish a realistic target and avoid surprises during negotiations.
- Plan Your Exit Strategy – Knowing your business’ current value helps you estimate when you’ll be financially ready to retire or pursue your next venture.
- Strengthen Negotiating Power – A professionally supported valuation provides credible evidence during discussions with potential buyers and can help justify your asking price.
- Prepare for Due Diligence – Buyers will closely examine your financial statements, operations, contracts, and legal matters. Starting early gives you time to organize records and resolve issues that could delay or derail a transaction.
Owners should begin the valuation and exit- planning 2-5 years before an anticipated sale. That timeline provides the greatest opportunity to implement changes that can increase both the company’s value and its attractiveness to buyers.