What is my company worth? What to expect when assessing your business’ value during turbulent times

Among the many tough decisions business owners are facing in 2020 is that of selling – specifically, whether now is a good time to transition the organization to a new owner, or better to hold on, ride out these turbulent times, and make that call further down the road. 

It’s a decision that’s come to the forefront, thanks to a perfect storm of more people reaching retirement age – approximately 10,000 people are retiring each day, and an estimated one trillion dollars in wealth will be transferred – and a shaky economic landscape that’s left many business owners who had been planning for high levels of profitability at the start of 2020 now considering their exit strategies sooner rather than later. 

What is my company worth?

Many scenarios, both business and personal, prompt business owners to ponder the question of selling, which leads to the question what is my business worth? This is where an objective, independent business valuation comes into play.

Quantifying the value of a business, business ownership interest, or intangible asset can be a complex analytical process. A business valuation helps ensure the best outcome – the sale makes sense financially and the timing is right for the business and for you as the business owner.

Business valuations during a pandemic

Typically, a valuation relies upon historical information, projected future information, industry research, and feedback from management and owners. This helps provide a snapshot of what the future might look like. But given the current economic instability and uncertainty, business valuations must be conducted differently since many things in the future remain a big question mark at this point. 

Here are the three ways we’re working with clients seeking a business valuation as part of their potential business transition:

  1. Business is (mostly) business as usual. This best-case scenario involves a business owner having a solid idea of what’s happening as a result of the pandemic and what they can expect in the near future. For example, the company’s work is under contract and there’s confidence that work will be completed and pay will be forthcoming. Companies in the technology industry tend have more clarity on this and know that revenue is coming given the increased focus on ways to work from afar. In this situation, a business valuation can be completed in a somewhat normal fashion. The business valuation involves looking at current and projected cashflow, among other factors such as risk and volatility.
  2. We can look to comparable companies. If it’s unclear how current events will impact the future of the business, it may be possible for the business valuation to include pre-pandemic values, as well as information from comparable publicly traded companies in their industry and how the average share prices have changed throughout course of the pandemic. In effect, we’re crowdsourcing our projections for the company by looking at how the stock prices performed for five to 10 comparable entities over time. 
  3. We make a broad-brush market adjustment. In the case of not having any real good comparable publicly traded companies as part of the valuation process, we can start by looking at pre-pandemic company values when there was more clarity for the business. From there, we can examine the closest index – for a tech company, for example, we’d use NASDAQ by looking at how the index changed from pre-pandemic levels to our valuation. Making a broad-brush market adjustment such as this is an alternative way to handle this kind of situation.

The events of 2020 have served as wake-up calls for individuals and businesses in numerous ways, not the least of which is how best to move forward in business. Selling your company may be on the table, a situation that benefits greatly from a professional business valuation. 

Arming yourself with information about the state of your business and its financial outlook will put you in the position of critically evaluating offers and making the best decision possible. 

Greg Light, CFA, ASA, is a Principal with Rehmann. With over 15 years of experience, exclusively in valuation, Greg has performed nearly 2,000 valuations of companies with revenue ranging from less than $1 million to more than $150 billion across a broad spectrum of industries. A trusted consultant known for his responsiveness and unbiased advice, Greg advises manufacturers, service providers and other small businesses on mergers and acquisitions, purchase price allocation, shareholder buy-in and buy-out, employee stock ownership plan valuation, family law, and gift and estate tax reporting. Contact Greg at greg.light@rehmann.com





Published in Business Consulting

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