Because of the Tax Cut and Job Acts of 2017, the marginal rates are lower. The impact of the recent tax cut is very straight forward. Lowering the rate, means a higher after-tax cash flow which translates into higher value for businesses.
Business owners know their business better than anyone. That being said, you would also assume they would know the value of the businesses? Not so fast!
Knowing your business and knowing what you think it is worth in reality can be two separate issues. If it were that simple, appraisers would not be needed, but they are, and they play very key role. They arrive at a fair market value after taking many facts into consideration.
Valuations; “The Walk Way Number”
The “country club” concept of a business owner having a number in his/her head as to what they would take, if offered, offers some interesting conversations during happy hour!
Over the years I have spoken to business owners, and periodically I have been told that the owner has a figure in their head, and if they were offered that figure for their business, they would take it! They seem to know their business better than anyone, so it is reasonable to believe they have a handle on the value of their company. In more cases than not, that figure would allow the owner to go and do what they want in life as it would give them the capital needed, and the can walk away from the business.
However, there are some different sides to this concept! A more logical way of knowing the business value!
The question is, “how they are coming up with their figure”? Is it something they dreamed up, or just a figure their friends came up with based a past sale of a competitor, or like kind of business?
Usually there is the multiple of the value (EBITAD), which can range from (5×7) x EBITDA. Of course, there are always numbers that vary from the variables which can be a range of numbers being calculated. THESE numbers can be higher or lower than EBITAD. The first question is what is the EBITAD value we are discussing? Is the value comparative to the owner’s value? Was the multiple the right multiple to use for this type of business?
What if the business is worth more than the EBITAD and multiples being discussed? Maybe much more than your walk-away number?
Business owners need understand it is in their best interest to have professional help when evaluating their business. They need to have supportive input for the professional appraisal, so they don’t undersell their business.
What if the “walk-away figure”, is unrealistic, and simply too high? What if the final offer was actually a very good and fair price for the company? There is a good chance there would not be a transaction, thus the owner walks away from a great offer and doesn’t even know it until it’s too late. A great opportunity has been missed by the owner that may not come around again.
The ups and down of the walk-away number
- Downside: If an owner sells at a walk-away number that is low, he is making a “gift” in sorts, of the excess value to the purchaser, rather than to his family, charity or another beneficial uses of that value.
- Upside: The owner has defined what he will sell the business for and is ready to sell. The owner would have successfully completed the sale of the business. Whether he received the real fair market value of the business, may be secondary in the larger scheme.
The bottom line is it is the owner’s best interest get professional valuation help to make sure the sales price they are accepting is the true value of the business.