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Writer's pictureKara Gibson Brzytwa

Why you need a valuation 5 years (!) before selling.

It is common knowledge that one gets a valuation when preparing for sale – but it is also helpful to get one years prior, to help you make strategic decisions in your business.

By knowing the value of your business, you can better define your goals for growth, and make informed decisions on changes to products and services, pricing, new potential investments, etc. Then, when it does come time to sell, you will have reasonable, realistic expectations for the net proceeds of your exit, and these net proceeds will align to your future financial requirements.


Let’s walk through some examples:


Example #1: A valuation can shed light on your company being ‘out of whack’ compare to industry multiples. What if rent is eating up too much of your expenses, compared to other similar-companies. Or your inventory? If significant enough, it can impact the value of your business, and/or make hard to sell. By doing a valuation a few years out, you can discover if you are leaving money on the table, and know if don’t look as strong compared to others in your industry. These points are valuable data – and knowing that you have time to make improvements leaves you in a strong position, and a better valuation when it does come time to exit.


Example #2: Another example is thinking through major capital investments. You need to be mindful about what is on the balance sheet, even several years out. If you’re continuing business as usual and initiate a new lease heavy equipment, it can be a blow to your balance sheet. Buying a piece of expensive equipment may not impact your valuation (business looks good with that new equipment!), but will impact the net proceeds to you at closing (buyer doesn’t want to assume the current lease on that machine- you have to pay it off with your proceeds). Or to put it in numbers, if you have $500,000 of leased equipment on your books, you’d get $500,000 less on $3,000,000 sale. Owners need balance of running the business while keeping an eye on valuation. If you can continue to be successful without brand new equipment, it’s a big plus for the money you’ll take home from the sale of your business. Business valuation can be complex; and vary by size, industry, and how the business is run. Because of this, a Brokers Opinion of Value or a Valuation is most meaningful when prepared by a professional like a business broker or intermediary.

Food for Thought:

Have an initial valuation done 3-5 years out from when you are thinking you want to exit your business. Whether the value is in line with your expectations or not, this will allow time to make adjustments within the business and decrease surprises when you are ready to sell. We provide this service alone, or as part of larger engagement services. Reach out if I can share more about the process of getting a valuation/broker's opinion of value completed.

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