We were recently asked to do a business valuation to help with a retirement and reorganisation in a fairly large group. Alarm bells started to ring pretty soon into the conversation when the director, who was appointing us, exclaimed that he assumed we could do the valuation “for a couple of hundred pounds or so”. The same bells started to ring very loud when we were told that we had to produce the number that the director wanted or else why would he pay our fees if we gave him the “wrong” number. They needed a third party valuation to demonstrate to HMRC that they had followed due process.
Needless to say we politely turned down the opportunity in this case.
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Have you ever watched Dragon’s Den on TV?
If so you can’t fail to have noticed one of the most common issues that applicants trip up on. It is also the one issue that really annoys the Dragons and, in many cases, leads to their rapid withdrawal from any deal.
So what do these Dragon’s Den hopefuls keep getting wrong? Simple – many of them enter the den with an inflated idea of what their business is worth. It is quite clear that most, if not all, of these applicants have not discussed their business value with a professional before entering the den.
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If you search for business valuations on the internet you will come across a number of sites (often the ones using Google Adwords) that offer free immediate valuations – just register and enter a few headline forms and out pops the magic number. Simples!
Well the age old saying applies here too – you get what you pay for. The number generated by these online calculators will not (should not!) be relied on by HMRC, Banks or anyone else for that matter as they simply do not consider all of the pertinent facts in each case.
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The three examples above show how many business owners do not appreciate how challenging it is to place a fair value on a business. Performing a business valuation is a big exercise and involves the collation and absorption of an awful lot of information – both internal and external data. As we have written in past posts the valuation of a business is not a science – it is the careful analysis and interpretation of this data, applied with a significant input of experience and sector knowledge.
On all valuations, as well as forming a detailed understanding of the business being valued, we also consider the wider market conditions and outlooks with politics, economics and other forces. We have reference to a broad range of external data sources which give us detailed commentary on specific sectors and give us right up to date data on business transactions that have taken place in “the real world”.
As a business owner you need to know your business value for many reasons during the life of your business and these can include applying for bank funding, shareholder appointments and retirements, disputes, divorce, the list is endless and in some cases could include appearing on a reality TV show.