Valuation lies…December 6, 2019
My second rant, as sensible cynic, is to highlight a few common features that surface in a business valuation or business exit process:
- Valuations / listing prices are based on a small pool of transaction evidence. Only a very small number of businesses actually sell, yet we use the statistics to value all businesses. Maybe valuations are skewed towards the ones that actually sold.
- Everyone reverts to a basic formula of 3 times profit. There is no market evidence for this. Neighbour Ned’s business sale a few years ago is probably not relevant
- Rules of Thumb (aka ROT) are like Santa, they are legendary and never seem to age.
- Hindsight is a wonderful invention. Take a look at recent corporate acquisitions to see what the stock market thinks of value compared to the price paid. Many big acquisitions have turned out to destroy not add value
- Owner expectations are too high (see all items above)
- The financials contain a sprinkle of personal banking and real business stuff. A purchaser wants to know the business return, not how you have manipulated the numbers to avoid giving the tax man more than necessary
- Ignore depreciation at your peril. Sure, it may be a fictional accounting thing, but there is a real cost of buying and maintaining equipment. Ignoring depreciation would assume that equipment never needs replacing
- Working capital is not well understood. If you sell your small business with a business broker, the likelihood is that it will be priced based on adjusted profit x multiple + stock. So, you want the purchaser to pay twice for stock?
- Damn taxes – if you actually sell, there may be something called Capital Gains Tax (CGT) that bites. The sale price is not actually what lands in your back pocket.
I guess we are done. More sensible cynic tirades to come.
*Popularised by Mark Twain: “There are three kinds of lies: lies, damned lies and statistics”