How Much Is My Business Worth in Charlottesville, VA?
Determining the value of a business is an important step for owners considering a sale, succession plan, financing, or future exit. However, there is no single formula that applies to every company. Revenue, profitability, assets, market conditions, industry, and future growth prospects can all influence value. Working with Business Brokers in Charlottesville VA can help owners understand the factors that may affect the potential market value of their company.
What Determines a Business’s Value?
Business valuation typically considers several financial and operational factors. Buyers often examine revenue trends, profitability, cash flow, assets, liabilities, customer relationships, and the stability of business operations.
A company with consistent earnings and well-organized financial records may be easier for prospective buyers to evaluate. Businesses with strong recurring revenue, diversified customers, documented processes, and growth opportunities may also receive different valuation considerations than companies that depend heavily on one customer or owner.
Why Financial Performance Matters
Financial performance is one of the most important components of a business valuation. Buyers generally want to understand how much sustainable income the business can generate after the transaction.
Several years of financial statements and tax returns can help demonstrate performance trends. Owners should ensure that their records are accurate and that unusual or one-time expenses are properly documented.
Charlottesville Business Brokers may review financial information as part of the valuation process and help owners understand which financial metrics prospective buyers are likely to examine.
How Industry and Market Conditions Affect Value
A business does not operate in isolation. Industry trends, competition, demand, economic conditions, and the availability of comparable businesses can influence how buyers assess an opportunity.
Local considerations can also matter. A company’s location, customer base, reputation, and position within its market may affect buyer interest. However, location alone does not determine business value.
Common Business Valuation Approaches
There are several approaches that may be used when estimating business value. An income-based approach considers the company’s ability to generate future earnings or cash flow. A market-based approach compares the company with relevant transactions or businesses when appropriate data is available.
An asset-based approach focuses on the value of business assets and liabilities. The appropriate method depends on the company’s industry, financial characteristics, and the purpose of the valuation.
What Buyers Look for Before Making an Offer
Prospective buyers generally want reliable information before deciding what they are willing to pay. They may review financial statements, tax records, contracts, leases, employee information, customer concentration, equipment, intellectual property, and operational processes.
A Charlottesville Business Broker can help organize relevant information and facilitate communication between sellers and qualified buyers. Proper preparation can make the business easier to evaluate and may reduce unnecessary delays during due diligence.
When Should You Get a Business Valuation?
Owners do not have to wait until they are ready to sell. A valuation can be useful several years before an anticipated exit because it can reveal areas that may need improvement.
Understanding the company’s current position can help owners identify opportunities to improve profitability, strengthen operations, diversify customers, or reduce risks before entering the market.
Get Professional Guidance on Business Value
Estimating the value of a privately owned company requires more than multiplying revenue by a standard number. Business Brokers in Charlottesville VA can help business owners review relevant financial and market factors and prepare for a potential transaction.
Filament Business Advisors provides business valuation, brokerage, exit planning, and acquisition advisory services. If you want to understand what your Charlottesville business may be worth, contact Filament Business Advisors to discuss your objectives and valuation needs.
Read MoreHow to Increase the Value of Your Business Before Selling (A Practical Guide for Business Owners)
Introduction
Most business owners focus on selling their business at the right time.
Fewer focus on something far more important:
👉 How to increase the value before selling
The difference between an average exit and a strong one is rarely luck-it’s preparation. Small improvements made before going to market can significantly increase valuation, attract better buyers, and create stronger negotiating leverage.
In competitive markets like Richmond and relationship-driven markets like Charlottesville, buyers are selective. They are not just looking for profitable businesses-they are looking for well-prepared, low-risk, and scalable opportunities.
The good news is that many of the factors that influence value are within your control-if you address them early enough.
Quick Answer
You can increase your business value by:
- Improving financial clarity
- Reducing operational risk
- Strengthening systems and processes
- Demonstrating growth potential
- Preparing the business 12–24 months before sale
Why Most Business Owners Leave Value on the Table
Many owners assume their business value is fixed.
It’s not.
Value is influenced by how buyers perceive:
- Risk
- Predictability
- Opportunity
Even small improvements in these areas can increase valuation multiples.
Example:
A business earning $300K annually:
- At 2.5x multiple → $750K
- At 3.5x multiple → $1.05M
👉 Same business, different preparation = major difference in outcome
How Buyers See Value Differently Than Owners
One of the biggest gaps in business sales comes from how owners and buyers define value differently.
Owners often think in terms of:
- Years of effort
- Investment made
- Emotional attachment
- Revenue milestones
Buyers think differently. They evaluate:
- Risk-adjusted return
- Predictability of income
- Ease of transition
- Future growth potential
Example:
A business owner may believe their business is worth a premium because of strong past performance.
A buyer may discount that same business if:
- The owner is heavily involved
- Financials are not clearly structured
- Growth is unclear
👉 This difference in perspective is where many valuation gaps occur.
Understanding how buyers think allows you to position your business more effectively and avoid pricing or expectation mismatches.
The 5 Core Areas That Drive Business Value
-
Financial Clarity and Quality of Earnings
Buyers don’t just look at revenue-they look at how clean and reliable the numbers are.
They want to see:
- Consistent financial performance
- Clear reporting
- Normalized expenses
If financials are unclear:
👉 Buyers assume risk
👉 Risk reduces valuation
This is why many owners begin by understanding how to value a business in Richmond, VA before planning a sale.
-
Reducing Owner Dependency
A business that depends heavily on the owner is harder to sell.
Buyers ask:
- Can this business run without the current owner?
- Will customers stay after transition?
Example:
If the owner handles:
- Key relationships
- Daily operations
- Decision-making
👉 Buyers see this as a major risk
Reducing owner involvement increases buyer confidence and improves value.
-
Strengthening Systems and Operations
Businesses with strong systems are easier to transfer.
Buyers prefer:
- Documented processes
- Standard operating procedures
- Efficient workflows
A well-organized business reduces uncertainty and makes the transition smoother.
-
Demonstrating Growth Potential
Buyers are not just buying what your business is-they are buying what it could become.
They look for:
- Expansion opportunities
- Untapped markets
- Scalability
Even moderate growth potential can significantly increase valuation.
-
Market Positioning and Buyer Demand
Value is influenced by how your business fits within the market.
In active markets like Richmond:
- Buyer competition can increase valuation
In markets like Charlottesville:
- Reputation and stability play a larger role
Understanding how to sell a business in Richmond, VA or position your business for selling a business in Charlottesville, VA helps align with buyer expectations.
How Small Improvements Create Large Valuation Differences
Many business owners assume they need major changes to increase value.
In reality, small improvements can create significant financial impact.
Example:
Improving profit margins by even 5–10% can:
- Increase EBITDA
- Improve valuation multiple
- Attract more buyers
Similarly:
- Reducing owner dependency
- Cleaning financial records
- Improving operational clarity
👉 These are relatively small efforts with disproportionately large outcomes.
Buyers reward clarity and confidence. Even modest improvements can shift how your business is perceived-and that perception directly impacts valuation.
Real-World Examples of Value Improvement
Example 1: Financial Cleanup
Before:
- Disorganized financials
- Unclear expenses
After:
- Clean records
- Consistent reporting
👉 Result: Increased buyer confidence and stronger offers
Example 2: Reducing Owner Dependency
Before:
- Owner involved in daily operations
After:
- Delegated responsibilities
- Built team structure
👉 Result: Easier transition, higher valuation
Example 3: Operational Improvements
Before:
- Informal processes
After:
- Documented systems
👉 Result: Increased efficiency and buyer interest
What Buyers Notice During Due Diligence
Due diligence is where buyers validate everything they’ve been told about your business.
At this stage, buyers focus on:
- Accuracy of financials
- Consistency of operations
- Reliability of systems
- Transparency of information
If discrepancies or gaps appear:
👉 Buyers either renegotiate or walk away
Example:
A business may receive strong initial offers, but during due diligence:
- Financial inconsistencies are discovered
- Documentation is incomplete
👉 Result:
- Lower final price
- Delayed closing
- Increased negotiation pressure
Preparing for due diligence early ensures smoother transactions and stronger outcomes
How Buyers Translate Improvements Into Value
Buyers don’t just notice improvements-they assign value to them.
For example:
- Lower risk → higher multiple
- Better systems → easier transition → stronger offers
- Growth potential → future upside → increased valuation
Even small improvements can lead to significant financial impact.
Richmond vs Charlottesville: Value Drivers Compared
Richmond
- Competitive buyer environment
- Faster deal cycles
- Higher expectations
👉 Preparation directly impacts pricing
Charlottesville
- Relationship-driven
- Slower decision-making
- Emphasis on stability
👉 Reputation and consistency matter more
When Should You Start Improving Value?
The best time to start is:
👉 12–24 months before selling
This allows time to:
- Improve financial performance
- Reduce risks
- Strengthen operations
Structured exit planning in Richmond, VA or planning in exit planning in Charlottesville, VA helps guide this process.
Common Mistakes When Trying to Increase Value
Focusing Only on Revenue
Revenue growth without profitability or stability does not increase value significantly.
Ignoring Risk
High risk reduces valuation even if profits are strong.
Waiting Too Late
Starting preparation too close to the sale limits improvements.
Why Timing and Value Improvement Work Together
Improving value and timing your sale are closely connected.
Even a well-prepared business may underperform if timing is poor.
Similarly, a well-timed sale can still fall short if the business is not properly prepared.
The strongest outcomes happen when both align:
- Business is optimized
- Market demand is strong
- Buyer interest is active
👉 This combination creates competitive tension among buyers, which often leads to better pricing and deal terms.
A Practical Action Plan
Step 1: Evaluate Current Value
Understand where your business stands today.
Step 2: Identify Weak Areas
Look for:
- Financial issues
- Operational gaps
- Risk factors
Step 3: Implement Improvements
Focus on:
- Financial clarity
- Systems
- Risk reduction
Step 4: Monitor Progress
Track improvements over time.
Step 5: Prepare for Sale
Align your business with buyer expectations before entering the market.
The Role of Advisors in Increasing Value
Working with experienced business brokers in Virginia helps:
- Identify improvement areas
- Guide preparation
- Maximize value
A Simple Value Check for Business Owners
Ask yourself:
- Are my financials clear and consistent?
- Can the business run without me?
- Are systems documented?
- Is growth potential visible?
If the answer is “no” to any of these:
👉 There is opportunity to increase value
The Difference Between an Average Exit and a Strong Exit
The difference between an average sale and a strong one is rarely the business itself.
It is the level of preparation and positioning before going to market.
Average exits typically include:
- Minimal preparation
- Reactive decision-making
- Limited buyer interest
Strong exits typically include:
- Strategic preparation
- Clear positioning
- Multiple buyer conversations
- Strong negotiation leverage
The same business can produce very different outcomes depending on how it is prepared and presented.
Final Thoughts
Increasing business value is not about making dramatic changes.
It’s about improving how your business is perceived by buyers.
By focusing on:
- Clarity
- Stability
- Structure
- Opportunity
You can significantly improve your outcomes and achieve a stronger, more successful exit.
FAQ
How can I increase the value of my business quickly?
Improving financial clarity and reducing risk are often the fastest ways.
Does preparation really impact valuation?
Yes. Well-prepared businesses consistently receive better offers.
When should I start preparing to sell?
Ideally 12–24 months before going to market.
Do buyers value growth potential?
Yes. Future opportunity plays a major role in valuation.
Read MoreHow Much Is My Business Worth in Richmond, VA? (A Realistic Guide Most Owners Misunderstand)
Introduction
Ask ten business owners what their business is worth, and most will give you a number immediately.
Ask a buyer the same question-and the answer will be completely different.
That gap between owner expectation and market reality is where most deals either stall, fail, or close below potential value.
In Richmond, VA-a market with active buyer demand and competitive deal flow-valuation is not just about numbers. It’s about how your business is perceived, positioned, and compared against other opportunities.
Understanding how valuation really works is not just helpful-it’s essential if you want to avoid leaving money on the table.
Quick Answer
Most small to mid-sized businesses in Richmond are valued between 2x to 5x EBITDA, depending on:
- Financial consistency
- Risk profile
- Industry demand
- Growth potential
- Buyer competition
But this range is only a starting point-not the final answer.
The Biggest Misunderstanding About Business Value
Most owners believe:
👉 “My business is worth what I’ve built.”
The market believes:
👉 “Your business is worth what someone is willing to pay-based on risk and future return.”
That difference is critical.
Two businesses with the same revenue and profit can sell at very different prices depending on how buyers evaluate them.
The Formula Everyone Talks About – and Why It’s Incomplete
The commonly used formula:
👉 EBITDA × Multiple
This is technically correct-but practically misleading.
Because:
👉 The multiple is not fixed
👉 It changes based on perception
And that perception is shaped by factors most owners don’t actively manage.
What Actually Determines Your Business Value
-
Financial Quality (Not Just Financial Size)
Revenue alone does not determine value.
Buyers look deeper:
- Is revenue consistent month-to-month?
- Are margins stable?
- Are expenses properly documented?
A $1M business with clean, predictable earnings can be worth more than a $2M business with inconsistent performance.
-
Risk (The Most Underrated Factor)
Risk is where most valuations are won or lost.
Common risk factors include:
- Owner dependency
- Customer concentration
- Lack of systems
- Unpredictable revenue
From a buyer’s perspective:
👉 Lower risk = safer investment = higher valuation
From a seller’s perspective:
👉 Reducing risk is often the fastest way to increase value.
-
Buyer Competition in Richmond
Richmond is not a passive market.
It has:
- Active deal flow
- Multiple buyer types (individuals, strategic, investors)
- Competitive evaluation
Buyers are often comparing:
- Your business
- 2–3 other similar businesses
- Alternative investment opportunities
This means:
👉 Your business is not evaluated in isolation
👉 It is evaluated in comparison
If your business is not clearly positioned, it gets overlooked-even if it’s fundamentally strong.
-
Growth Potential (Future Drives Value)
Buyers don’t pay for what your business did.
They pay for what it can do next.
Growth signals include:
- Expansion opportunities
- Untapped markets
- Operational scalability
A business with clear growth pathways can command significantly higher multiples-even if current profits are moderate.
-
Operational Strength and Transferability
A business that depends heavily on the owner is harder to sell.
Buyers prefer:
- Systems over individuals
- Teams over single points of failure
- Processes over improvisation
The easier your business is to transition, the more valuable it becomes.
Richmond Market Insight (Why Location Matters)
Richmond’s market creates both opportunity and pressure.
Opportunity:
- Strong buyer demand
- Access to capital
- Diverse industries
Pressure:
- Buyers compare aggressively
- Expectations are higher
- Weak businesses get filtered out quickly
👉 Translation:
A well-prepared business can outperform expectations.
An unprepared business can underperform-even in a strong market.
Typical Valuation Ranges (Contextual, Not Absolute)
While every business is unique:
- Small businesses → 2x–3x EBITDA
- Service businesses → 2.5x–4x
- Scalable or growth-focused → 3x–5x+
But remember:
👉 These ranges shift based on risk, positioning, and demand.
Why Most Business Owners Overestimate Value
-
Emotional Attachment
Owners often factor in:
- Years of effort
- Personal sacrifice
- Brand identity
Buyers don’t.
They focus on:
👉 Risk and return
-
Confusing Revenue with Value
High revenue does not guarantee high valuation.
If margins are weak or inconsistent:
👉 Value decreases
-
Ignoring Market Conditions
Even a strong business can underperform if:
- Buyer demand is low
- Industry trends are shifting
-
Lack of Preparation
This is the most fixable-and most ignored-factor.
Unprepared businesses:
- Take longer to sell
- Attract fewer buyers
- Receive lower offers
How to Increase Your Business Value (Practical Steps)
Improve Financial Clarity
- Clean up accounting
- Normalize expenses
- Show consistent trends
Reduce Owner Dependency
- Delegate operations
- Build a capable team
- Document responsibilities
Strengthen Systems
- Standardize processes
- Improve efficiency
- Reduce operational friction
Highlight Growth Opportunities
- Identify expansion areas
- Show scalability
- Present future potential clearly
Valuation vs Selling Price (Critical Difference)
Your valuation is:
👉 An estimate
Your selling price is:
👉 A negotiated outcome
The final result depends on:
- Buyer competition
- Deal structure
- Negotiation strategy
Why You Should Understand Value Before Selling
Many owners jump directly into selling.
That’s a mistake.
Instead:
👉 Start with valuation
👉 Then move to strategy
Understanding how to sell a business in Richmond, VA becomes much more effective when you already know how your business will be perceived.
For long-term improvements, structured exit planning in Richmond, VA can significantly increase valuation before entering the market.
When to Get a Professional Valuation
You should consider a professional valuation if:
- You are planning to sell within 1–3 years
- You want realistic expectations
- You want to improve value before selling
To understand the process in detail, you can explore how to value a business in Richmond, VA with professional guidance.
A Simple Reality Check for Business Owners
Ask yourself:
- Would I buy this business at my expected price?
- Does the business run without me?
- Are financials clear and consistent?
- Is growth obvious to an outsider?
If the answer is uncertain:
👉 There is room to improve valuation.
Final Thoughts
Your business is not worth what you think-it’s worth what the market sees.
And what the market sees is influenced by:
- Risk
- Clarity
- Structure
- Opportunity
The difference between an average exit and a strong one often comes down to preparation, not luck.
FAQ
How is a business valued?
Most businesses are valued using EBITDA multiplied by a market-based multiple, adjusted for risk and growth potential.
What affects valuation the most?
Financial consistency, risk level, and growth potential are the biggest factors.
Can I increase my business valuation?
Yes. Improving financial clarity, reducing risk, and strengthening operations can significantly increase value.
Should I get a professional valuation?
Yes, especially if you are planning to sell or want to improve your positioning in the market.
Read More
How Does Your Business Compare?
When considering the value of your company, there are basic value drivers. While it is difficult to place a specific value on them, one can take a look and make a “ballpark” judgment on each. How does your company look?
| Value Driver | Low | Medium | High |
|---|---|---|---|
| Business Type | Little Demand | Some Demand | High Demand |
| Business Growth | Low | Steady | High & Steady |
| Market Share | Small | Steady Growth | Large & Growing |
| Profits | Unsteady | Consistent | Good & Steady |
| Management | Under Staffed | Okay | Above Average |
| Financials | Compiled | Reviewed | Audited |
| Customer Base | Not Steady | Fairly Steady | Wide & Growing |
| Litigation | Some | Occasionally | None in Years |
| Sales | No Growth | Some Growth | Good Growth |
| Industry Trend | Okay | Some Growth | Good Growth |
The possible value drivers are almost endless, but a close look at the ones above should give you some idea of where your business stands. Don’t just compare against businesses in general, but specifically consider the competition.
As part of your overall exit strategy, what can you do to improve your company?
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: kconnors via morgueFile
How Does Your Business Compare?
When considering the value of your company, there are basic value drivers. While it is difficult to place a specific value on them, one can take a look and make a “ballpark” judgment on each. How does your company look?
| Value Driver | Low | Medium | High |
|---|---|---|---|
| Business Type | Little Demand | Some Demand | High Demand |
| Business Growth | Low | Steady | High & Steady |
| Market Share | Small | Steady Growth | Large & Growing |
| Profits | Unsteady | Consistent | Good & Steady |
| Management | Under Staffed | Okay | Above Average |
| Financials | Compiled | Reviewed | Audited |
| Customer Base | Not Steady | Fairly Steady | Wide & Growing |
| Litigation | Some | Occasionally | None in Years |
| Sales | No Growth | Some Growth | Good Growth |
| Industry Trend | Okay | Some Growth | Good Growth |
The possible value drivers are almost endless, but a close look at the ones above should give you some idea of where your business stands. Don’t just compare against businesses in general, but specifically consider the competition.
As part of your overall exit strategy, what can you do to improve your company?
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: kconnors via morgueFile
Read More
Valuing the Business: Some Difficult Issues
Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate.
Here are some issues that must be considered when arriving at a value for the business:
Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms.
Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue.
Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value.
Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption.
ESOP Ownership – A company owned by employees, either completely or partially, requires a vote by the employees. This can restrict marketability and, therefore, the value.
Company/Industry Life Cycle – A retail/repair typewriter business is an obvious example, but many consumer product firms fall into this category.
Other issues that can impact the value of a company would include inventory that is dated or not saleable, reliance on short contracts, work-in-progress, and any third-party or franchise approvals necessary to sell the company.
Related Business Advisory Services
If you are a business owner planning your next steps, it’s important to understand how valuation, exit planning, and the selling process work together.
Whether you are preparing for a transition or exploring your options, you can learn more about:
Core Services:
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: DuBoix via morgueFile
Read More
Two Similar Companies ~ Big Difference in Value
Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference?
One can look at the usual checklist for the answer, such as:
- The Market
- Management/Employees
- Uniqueness/Proprietary
- Systems/Controls
- Revenue Size
- Profitability
- Regional/Global Distribution
- Capital Equipment Requirements
- Intangibles (brand/patents/etc.)
- Growth Rate
There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example:
- Are the company’s projections believable?
- Where is the growth coming from?
- What services/products are creating the growth?
- Where are the customers coming from to support the projected growth – and why?
- Are there long-term contracts in place?
- How reliable are the contracts/orders?
The difference in value usually lies somewhere in the company’s growth rate!
Valuation & Planning:
- Business Valuation in Richmond, VA
- Business Valuation in Charlottesville, VA
- Exit Planning in Richmond, VA
- Exit Planning in Charlottesville, VA
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: jeltovski via morgueFile
Read MoreThree Basic Factors of Earnings
Two businesses for sale could report the same numeric value for “earnings” and yet be far from equal. Three factors of earnings are listed below that tell more about the earnings than just the number.
1. Quality of earnings
Quality of earnings measures whether the earnings are padded with a lot of “add backs” or one-time events, such as a sale of real estate, resulting in an earnings figure which does not accurately reflect the true earning power of the company’s operations. It is not unusual for companies to have “some” non-recurring expenses every year, whether for a new roof on the plant, a hefty lawsuit, a write-down of inventory, etc. Beware of the business appraiser that restructures the earnings without “any” allowances for extraordinary items.
2. Sustainability of earnings after the acquisition
The key question a buyer often considers is whether he or she is acquiring a company at the apex of its business cycle or if the earnings will continue to grow at the previous rate.
3. Verification of information
The concern for the buyer is whether the information is accurate, timely, and relatively unbiased. Has the company allowed for possible product returns or allowed for uncollectable receivables? Is the seller above-board, or are there skeletons in the closet?
What is the Value of Your Business? It All Depends.
The initial response to the question in the title really should be: “Why do you want to know the value of your business?” This response is not intended to be flippant, but is a question that really needs to be answered.
- Does an owner need to know for estate purposes?
- Does the bank want to know for lending purposes?
- Is the owner entertaining bringing in a partner or partners?
- Is the owner thinking of selling?
- Is a divorce or partnership dispute occurring?
- Is a valuation needed for a buy-sell agreement?
There are many other reasons why knowing the value of the business may be important.
Valuing a business can be dependent on why there is a need for it, since there are almost as many different definitions of valuation as there are reasons to obtain one. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. Likewise, if a business partner is selling half of his business to the other partner, the departing partner would want as high a value as possible.
In the case of a business loan, a lender values the business based on what he could sell the business for in order to recapture the amount of the loan. This may be just the amount of the hard assets, namely fixtures and equipment, receivables, real estate or other similar assets.
In most cases, with the possible exception of the loan value, the applicable value definition would be Fair Market Value, normally defined as: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” This definition is used by most courts.
It is interesting that in the most common definition of value, it starts off with, “The price…” Most business owners, when using the term value, really mean price. They basically want to know, “How much can I get for it if I decide to sell?” Of course, if there are legal issues, a valuation is also likely needed. In most cases, however, what the owner is looking for is a price. Unfortunately, until the business sells, there really isn’t a price.
The International Business Brokers Association (IBBA) defines price as; “The total of all consideration passed at any time between the buyer and the seller for an ownership interest in a business enterprise and may include, but is not limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, non-competition agreements, employment, and/or consultation agreements, licenses, customer lists, franchise fees, assumed liabilities, stock options or stock redemptions, real estate, leases, royalties, earn-outs, and future considerations.”
In short, value is something that may have to be defended, and something on which not everyone may agree. Price is very simple – it is what something sold for. It may have been negotiated; it may be the seller’s or buyer’s perception of value and the point at which their perceptions coincided (at least enough for a closing to take place) or a court may have decided.
The moral here is for a business owner to be careful what he or she asks for. Do you need a valuation, or do you just want to know what someone thinks your business will sell for?
Business brokers can be a big help in establishing value or price.
Read MoreCreating Value in Privately Held Companies
“As shocking as it may sound, I believe that most owners of middle market private companies do not really know the value of their company and what it takes to create greater value in their company … Oh sure, the owner tracks sales and earnings on a regular basis, but there is much more to creating company value than just sales and earnings”
Russ Robb, Editor, M&A Today
Creating value in the privately held company makes sense whether the owner is considering selling the business, plans on continuing to operate the business, or hopes to have the company remain in the family. (It is interesting to note that, of the businesses held within the family, only about 30 percent survive the second generation, 11 percent survive the third generation and only 3 percent survive the fourth generation and beyond).
Building value in a company should focus on the following six components:
- the industry
- the management
- products or services
- customers
- competitors
- comparative benchmarks
The Industry – It is difficult, if not impossible, to build value if the business is in a stagnating industry. One advantage of privately held firms is their ability to shift gears and go into a different direction. One firm, for example, that made high-volume, low-end canoes shifted to low-volume, high-end lightweight canoes and kayaks to meet new market demands. This saved the company.
The Management – Building depth in management and creating a succession plan also builds value. Key employees should have employment contracts and sign non-compete agreements. In situations where there are partners, “buy-sell” agreements should be executed. These arrangements contribute to value.
Products or Services– A single product or service does not build value. However, if additional or companion products or services can be created, especially if they are non-competitive in price with the primary product or service – then value can be created.
Customers – A broad customer base that is national or international is the key to increasing value. Localized distribution focused on one or two customers will subtract from value.
Competitors – Being a market leader adds significantly to value, as does a lack of competition.
Comparative Benchmarks – Benchmarks can be used to measure a company against its peers. The better the results, the greater the value of the company.
Three keys to adding value to a company are: building a top management team coupled with a loyal work force; strategies that are flexible and therefore can be changed in mid-stream; and surrounding the owner/CEO with top advisors and professionals.
