Public companies get a valuation prior to a capital raising or business exit so that they can discharge their duties to their shareholders.   Privately owned companies, however, often resist a valuation because the owners are the shareholders.

There is a tendency amongst directors of some privately owned mid-market companies to ask the question, “Why  do I need a valuation of the business?  A valuation of the land and stock I can understand, but why the business as well?” 

This can come from privately held businesses worth tens of millions of dollars.  The most common reasons I hear for resisting a business valuation up front are:

• ‘The business is only worth what someone is going to pay for it.”
• “We pretty much know what it is worth.”
• “We are not spending money on a valuation until we have an investor/buyer lined up.”

It is true that the business, in the end, is only worth what someone is willing to pay.  It is less true (and usually false) that most business owners know what a business is worth.  It is false that you should not spend money on a valuation until you have an interested party.  If someone is interested, they are unlikely to wait the weeks or months it takes you to get the valuations.  Their interest usually just evaporates.

Even if you feel you don’t owe a duty to your shareholders (because you are the only shareholder), there are many compelling reasons to get your valuations done as the first step in a capital raising or business exit:

• If you don’t have a valuation, how will you know if the offers you get are good or bad?
• If you are locked in negotiations with an investor or buyer who is telling you that the business, the buildings, the stock in trade or the IP is only worth one amount, what objective evidence can you slide across the table to prove that it is worth a different amount?
• When the investor or buyer points out one similar business that sold for less than you are asking, what document will you have that says five or ten comparable businesses sold for same or more than you are asking?

Should I Give the Prospective Purchaser the Valuation?

In a capital raising, you need to give them great detail on your valuation.  In a business exit, however, the preferred position is not to provide a buyer with the valuation.  In fact, the preferred position is not to even provide the buyer with a price.  Naming a price is simply an invitation to negotiate downwards from there.  There are times, however, when the buyer is so far from the mark that giving them one of the valuations on the aspect in contention (for example the plant and equipment), frames the issue in a different way.

Will the Investor or Buyer do its Own Valuation?

When the prospective investor or buyer is an ASX listed company, or a company with strict governance principles, it will do its own valuation anyway.  This is so that the executives involved can go to their board and justify the price.  The board will then, in turn, justify the price to the shareholders on the basis of the valuation.  Such a buyer, however, is unlikely to show youthe valuation if it thinks it can invest in, or buy, the business for less.

Why Get a Valuation Before Going to Market?

You just need to have a valuation before raising capital for the four reasons below.  There are also compelling reasons to get a business valuation  before a business exit:

• A valuation gives you a dispassionate third party opinion to put the offers in context. Granted, when the offer is more than the valuation, the valuation tends to stay in the bottom drawer, but you still need a valuation to know when not to produce it.
• Another reason to get a valuation is because it is a logical enquiry into all the variables that make up your business.  It shows how improving one variable can impact the other variables and the overall price.  It lays the groundwork for, and gives insights into, the lengthy conversations you are going to have about value.
• Valuations also give you hard facts to back up your negotiating position.  They remove the emotional content from price discussions.  For example, some SMEs and even mid-sized businesses base the selling price on the amount they need to pay out the bank, the amount the owners estimate they will need for retirement.  Some entrepreneurs use what’s called,“the worst valuation method in the world”: the amount of capital they are prepared to give away divided by the amount of money they need.  These are illogical considerations in determining the intrinsic value of the business.
• There is a further reason to get a valuation.  You owe it to your shareholders to try to improve the valuation prior to a capital raising or a sale, so you need a baseline to measure the improvement.  If you are the only shareholder, then you owe it to yourself.

Conclusion

There are a lot of costs in getting a business Investor Ready or ready for sale.  Owners don’t usually quibble about getting the property valuation and the plant and equipment valuation.  So going the next step and getting a business valuation should not be the issue that it is.