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Knowing the value of your business is always important, but changing economic and business factors make having a current valuation even more vital.
According to BizBuySell’s Second Quarter 2023 Insight Report, which tracks and analyzes U.S. business-for-sale transactions and sentiment from surveys of business owners, buyers, and brokers, sale prices are trending downward. The median sale price in the second quarter dropped 14 percent from the previous quarter and the median asking price was down 8 percent.
“Compared to the last decade, inflation and higher interest rates, instability with banks, and fear of recessions are all driving lower valuations,” said Chuck Richards, chief executive officer of ValuCompass. “So, if an owner goes to market to sell or finance, updating the valuation will be important.”
MassMutual research supports these concerns showing that 9 out of 10 business owners worry about inflation.1 They are also concerned about the business impacts of rising interest rates (80 percent), the looming possibility of a recession (80 percent), and stability in the banking system (67 percent).
“Anything that adds to the confidence in a business’s ability to generate future revenue and profit is good for a valuation and the ability to sell on the owner’s terms — and vice versa. Anything that strips away confidence does the opposite,” Richards said.
With several external factors potentially stripping away that confidence, owners can benefit from knowing the current value of their business, yet only 52 percent have had a valuation within the past three years, according to MassMutual’s 2022 Business Owner Perspectives Study.
But more hinges on the value of a business than a price range. From buy-sell agreements between business partners to an owner’s retirement and the fate of employees, having an accurate and current assessment of a business’s worth is essential to properly planning for its future and increasing value.
“At the end of the day, buyers and investors are always looking for quality businesses,” Richards said. “Smart owners use the valuation process to prove they have a quality business, especially in tough markets like 2023.” (Related: It pays to establish business valuations)
Why owners shouldn’t estimate value themselves
As always, decreasing business risk increases business value.
“A business is only worth what somebody is going to pay for it, and the way you’re going to maximize the value is to make sure there’s as little risk as possible,” said Brian Trzcinski, director of business market development for MassMutual.
The biggest risk — with the most potential to impact value — remains owner dependency.
“An acquirer wants to know that if they take the owner out of the business, that it would still be able to generate value and profit,” Trzcinski said.
Owners often struggle to value their business themselves, because they don’t know how to assess the worth of intangibles like owner dependency or other fundamental value drivers, such as the strength of a company’s management team, brand or operational efficiency, and processes.
“It’s very difficult for a business owner to step back and put an objective value on the things they are so close to,” Trzcinski said. (Related: Is the business your baby or your lifestyle?)
Self-valuation by business owners may miss the true valuation by as much as 60 percent, either over or under the actual value, Trzcinski noted.
“It’s important for them to talk with someone with the right credentials for valuing their business. If they don’t, they won’t be starting from a solid foundation when planning for their business, whether it’s to grow, sell or fund their retirement,” he said.
Valuations need to be revisited regularly
Baby boomers make up a large percentage of small-business owners in the United States, and experts have been predicting a “Silver Tsunami” — where the population of older adults will be greater than the number of children in the country — for what seems like a decade.
“It’s going to be much more competitive to position your business for sale as baby boomers get older and more businesses hit the market. There’s only going to be so many buyers for all those businesses,” Trzcinski said.
This appears to be the case based on BizBuySell’s latest Insight Report, which indicates that sales and asking prices were down in the second quarter. However, the number of acquisitions increased by 8 percent. In addition, 48 percent of surveyed business owners said rate hikes had no impact on their timelines to exit.
Rather than waiting for economic conditions to change, buyers and sellers are getting creative around how they structure deals. (Related: Top 10 questions for business owners)
“With the credit markets being confused — thanks to issues with banks that serve businesses, plus inflation moves by the Fed — the markets were in a slow, wait-and-see mode that impacted both the price of deals and the terms. Simply put, when prices are down, sellers may be forced to ‘take back more paper’ or leverage their real estate to bridge the gap if they want to close,” Richards said.
Such periodic adjustments are common, however, and better market conditions will return, he said.
“What it means to those thinking of selling or needing to raise capital is that the business valuation you had last year needs a review,” he said.
As markets shift and conditions change, getting a business valuation is increasingly important to keeping up. Trzcinski recommends having a business valuation done at least every three years.
“Obviously, the more frequent, the better, especially if something has significantly impacted the business, or you are preparing it for sale,” he said.
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