Why To Get A Valuation Now

Some firm owners are under the impression that you should only get a valuation when a sale is imminent. By definition, a valuation is a point-in-time look at the value of your business, so we understand the confusion. While it’s true that a valuation is a point-in-time look, it is actually most helpful as a tool if you are tracking it over time. So, here are a few reasons why you should consider getting a valuation sooner than you think.

Conversation Starter

Valuations are often used when discussing succession planning. This is a big, thorny issue for many, and the great thing about getting a valuation done sooner is that it forces you to start thinking through succession, which can take years to pull off effectively. If nothing else, a valuation gives you an objective starting place and permission to have a conversation with someone who specializes in exits.

Planning Tool

A valuation can be one of the best long-term planning tools in your toolbox. Coupled with a high-level forecast, it can help you determine how close you are and will be to hitting financial goals. When principals first start thinking through succession, the options available can seem overwhelming:

• Shut the firm down
• Continue indefinitely
• Sell to someone internally
• Sell to an outside buyer
• Partner buyout
• ESOP

A valuation (and the discussion surrounding it) can help you narrow down your options by showing you the implications of different types of transitions. We see many folks with renewed focus and energy after going through the process.

Accuracy Not Dependent on Full Year Financials

Some people are under the impression that a valuation is going to be most helpful/accurate when you’re looking at full financial years’ worth of data. But think about it this way. Transactions happen all the time—not just early in the year when folks have closed the books on December (or whenever you close your fiscal year). There is no artificial time constraint on when a valuation is most accurate. We have recently upgraded our financial modeling and now look at TTM (trailing 12 months) when conducting valuations. This gives you a precise view at any point in time with the most up-to-date data available, using the same methods that sophisticated private equity firms are using.

Knowledge is Power

Your own business is likely the largest individual asset you own. So purely from an asset tracking perspective, valuations are helpful tools to give you a broader sense of your net worth. Beyond that, however, valuations can help with decision-making within your business.

Consider this: if you’re at all interested in selling your firm one day, you need to be concerned with the deal terms. How much money will you receive upfront? How hard will any performance targets be to hit? How long will you be expected to stay on for an earn-out? While a valuation won’t give you the answers to these questions, it will enable us to provide some directional guidance on what to expect. Some of the key inputs into these equations are things like:

• Your client concentration
• Your profitability, adjusted for add-backs and principal compensation
• Your growth trajectory
• Your positioning

We do a few things when building our valuations to make them uniquely helpful:

• Make them editable. We build in spreadsheet format and teach you how they are built, so you have the power to make a copy and update with current numbers, whenever you like.
• Look at your firm as an outside buyer would. We want you to be able to maximize your firm’s value, so we will show you how an outside buyer would evaluate you. We won’t artificially inflate your firm’s value so that we can have an honest conversation with you.
• Provide a Sellability Index. We assign you a score between 0-100 that measures you on the factors most important to most buyers. As you update your valuation, your Sellability Index will also update, so you can play around with inputs to see how things might change.
• Offer ongoing support. A valuation is a $5,000 one-time cost. We will always be here to answer questions as they come up, and we are also available to update your valuation for just $2,500 if done annually. We like doing this because it gives us permission to continue a conversation with you about your firm’s progress and what we are seeing in the current M&A environment. We are also able to fine tune some of the more subjective inputs that might change over time, like index compensation, the multiple used, and your firm’s positioning. 

We do our best to not sound like used car salesmen over here. But we also do think there is a lot of value in having a valuation conducted sooner than you might think. Keep this in the back of your mind, and feel free to hit reply if you want to talk more.