Assessing perceived business worth against actual business value.
Assessing perceived business worth against actual business value.
By Alex Dodgshon

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Balancing perceived business worth with actual business value

TAGS:  Business Exit Strategies, Exit Planning, Maximising a Business Sale Price, Value Builder Methodology

When the New York Attorney General filed legal action against Donald Trump in September 2022, it made for an interesting discussion about actual versus perceived business value.

The civil fraud lawsuit accused the former US president and three of his children of ‘staggering fraud’ and inflating his net worth by billions to ‘enrich himself and cheat the system’.

You’ll be pleased to hear we won’t be getting into the nitty gritty of the lawsuit in this blog (the case promises to run for a long while yet), though it does raise an important question for UK business owners.

What business valuation lessons can we learn from this case?

It’s clear that overvaluing your business could get you into serious trouble. Business owners looking to sell their company must achieve a balanced and realistic valuation. Your personal perception of business worth might be far away from its realistic market value, and more importantly your perfect buyer’s budget.

Let’s explore some factors that skew perceptions of business value.

Remove emotion from the business valuation

Your business might be your baby but remember, potential buyers have no emotional connection to it. Buyers have an eye on potential profit streams and are looking for signs it’s going to make money.

Let’s take the Trump case as an example. The lawsuit states that Trump’s Florida residence, Mar-a- Lago, was overvalued by up to $664m!

Ask any home owner how much their home is worth and they will often value their house higher than an estate agent. This is because we have an emotional connection to our property. We know what it cost to put the new kitchen in. We know how hard we worked to get the garden looking lovely. It’s the same with company valuations, owners have to remove the emotion and be realistic about value to build confidence with prospective buyers.

Don’t believe hearsay

Picture this. You’re in the pub having a glass of wine at the end of a hard week. You overhear someone telling a friend about a construction firm, which has sold for just over £10million. You go home that night seriously believing you could get the same figure for yours.

But here’s the thing. In the real world the two businesses are incomparable. Yours is a (very successful) family run local construction company. It’s profitable and efficiently managed, but you operate on a different scale to the nationwide construction firm that’s the subject of pub chat.

Stories of big budget sales in the press and online usually relate to big business. Yes, do your research but try your best to keep some perspective.

Put your ego to one side

Your business doesn’t owe you anything. Not a thing. It doesn’t matter how long you’ve been operating, if your name is on the sign outside, or how thick your little black book is. Company value is only ever based on profitability. Whilst physical assets like machinery and freeholds will always have a value, assets like a strong customer database or a huge social media following are worthless unless the business can actively leverage them to make a profit.

How strong are your competitors?

Are you the one to beat in the marketplace? Or is the local market saturated with similar businesses? You might think your business is light years ahead of the competition but if your business didn’t exist, would the market miss you or would they easily find an alternative? Perceived value amongst prospective buyers is likely to be much higher for unique, niche businesses with a well defined market.

Time for a business value reality check

When valuing a company, a broker considers various drivers of business value. From location and business type, to customer base, staff and average industry values. At Uscita we use a proven international methodology called The Value Builder System™. It provides a balanced structure for valuation based on actual worth and profit.

So how does a business broker calculate actual business worth?

We start with financial performance and profit followed by seven other factors that can increase or decrease value. These include:

  • Potential for growth
  • Dependency on staff, customers and suppliers
  • Cash flow
  • Recurring revenues
  • How your business compares to the competition
  • Customer satisfaction
  • How your business would perform if you walked away today

For an independent view of what your business is actually worth, benchmarked with an internationally proven methodology that is  The Value Builder System™ book an initial call.  Throughout the valuation process your business broker will remain completely independent with zero emotional attachment. This is key to preparing a balanced, realistic market valuation without a hint of perceived worth, and thankfully no chance of a Trump-esque lawsuit coming.

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