Oftentimes business owners go down the path of selling their business ill-equipped.

Perhaps the owner has built a thriving business and rightfully pats himself on the back for his achievements, but what has he truly built? More importantly, what is its precise value to a potential buyer?

In other words, what is the price a buyer should be willing to pay to acquire the business? The exact value is elusive and complicated to determine.

When a business owner gets even the slightest hint of an interest in exploring sale options, he should engage a valuation expert to get a thorough, unbiased determination of value.

Valuation experts

Who is the valuation expert? Customarily it would be a certified public accountant, or CPA, who has specialized training in business valuations like the Accredited in Business Valuation, or ABV, designation. For ease of reference, let’s call these professionals ABV CPAs.  

These professionals are often engaged to provide a thorough valuation report. But, equally important, they are often called upon to defend their valuations when, for example, the client is audited by taxing authorities or when acting as expert witnesses in court proceedings that hinge on business valuations.

Consider the timing

Timing is critical. Expect that the valuation process will take a few months to complete. Not only will the ABV CPA need time to produce the valuation, but the business owners likely will need time to put together all the information requested by the ABV CPA for review.

Additionally, sometimes the business owner needs to engage his or her CPA to produce the information responsive to the ABV CPA.

This also adds to the time to complete the valuation.

After the business owner provides all the requested substantiating information, then plan on the ABV CPA taking a month or more to review and generate the valuation. That’s why it’s important that the process starts when the first hint of interest in selling arises—the process takes time.

Might your own CPA provide the valuation? Maybe. If you have a longstanding relationship with a CPA, feel free to ask about his or her ability to provide a valuation similar to that of an ABV CPA.

If your CPA is interested, he or she should also be prepared to defend the valuation. However, more often than not, the existing CPA feels comfortable handing off that work to the ABV CPA because of the additional expertise provided and the fact that the engagement with the ABV CPA is limited in scope – meaning the current CPA is unlikely to lose your long-held business.

Cut the fluff

What does early engagement of the ABV CPA provide? Not only does the business valuation provide the seller with a more thorough understanding of the value of the business for sale negotiations, but it can also provide insight into important business changes the owner can implement to increase the value of the business prior to sale.

It provides an opportunity for the owner to begin to cut out the fluff to showcase a more accurate income stream from operations.  

Maybe the owner or her family working in the business should have their salary modified to reflect reasonable wages. Maybe company expenses should begin excluding the owner – call it a gray area – expenses that are often liberally deducted in small businesses and affect the bottom-line value of the company. Maybe it helps to identify and adjust budget items to match industry expense expectations more closely.

The bottom line is that it can provide the tools to help the owner understand how to drive the business valuation higher over time, and importantly prior to opening the books to a potential buyer.

Final selling price

Will the sale price be the valuation? A business valuation will not necessarily align with the final selling price of the business.

This is a common occurrence when predictions meet the realities of the marketplace. Sometimes a buyer will pay more because of a strategic interest in the business. Sometime the buyer pays less.

Nevertheless, the valuation provides the seller with a more accurate and honest assessment of the business’ value.

The seller should also understand that a savvy buyer will often go through a similar process with his or her own ABV CPA to determine the offer price.

By starting the process early, the owner puts himself in the best possible position to begin negotiations with any potential buyer, armed with an understanding of valuation methodology as well as the specific valuation for his business in his back pocket.

Beau Ruff, a licensed attorney and certified financial planner, is the director of planning at Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick.