Helping business owners achieve their dreams, one step at a time. Author / valuation nerd / consultant / Principal at Gateway Valuation Consulting, LLC.
United States
Joined January 2016
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A valuation prepared today can still be measuring what a business was worth months—or even years—ago.
More on why the date can change the analysis:
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What is a fair price when a key employee is buying into a privately held company?
It usually should not be based on what a strategic buyer might pay for the entire business.
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A law firm’s revenue can be impressive while telling surprisingly little about what the firm is actually worth. Partner compensation, transferable earnings (and more) plus risk can all matter.
A practical look at law firm valuation:
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When a plan holds closely held company stock, the valuation should clearly support what is being valued, how the conclusion was developed, and how enterprise value becomes equity value.
More here:
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The final share price may be the simplest part of a 409A valuation.
The harder work comes before it—valuing the business, bridging to equity, understanding the capital structure, and connecting the conclusion to the actual award.
A closer look:
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Owning 25% of a private company does not necessarily mean owning 25% of its value.
The rights attached to an ownership interest—and the difficulty of selling it—can materially affect what that interest is worth.
A short explanation:
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“Companies in our industry sell for 1x revenue.”
Maybe. But that tells you very little by itself.
Margins, growth, risk and the quality of earnings can make two companies with identical revenue worth very different amounts.
More here:
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A company’s reported earnings are not always the earnings a buyer or appraiser should rely on.
The harder question is what level of earnings is actually sustainable.
I wrote about that judgment here:
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A three-year average can look objective and still be wrong.
If a business has materially changed, older results may no longer say much about its current earning capacity.
I wrote about when the most recent year may deserve more weight:
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A $10 million enterprise value does not necessarily mean the owners have $10 million of equity value.
Cash, debt, working capital and other claims can materially change the answer.
A short paper I wrote on how the pieces fit together:
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Most valuation problems can't be fixed six months before a sale.
Customer concentration, owner dependence, margins and management depth usually take time to change.
That is one reason understanding value early can matter.
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Business owners naturally look at what they built.
A buyer looks at what the business is likely to produce going forward—and the risk involved in producing it.
That difference explains a lot of valuation surprises.
Good perspective from Forbes:
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One of the most valuable things a business owner can build is a company that doesn't need them for every important decision.
Owner dependence isn't just an operational issue. It can also become a valuation issue.
Worth reading:
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A useful question for a business owner:
Could someone understand your company without you sitting in the room explaining it?
Good financial records, documented decisions and a clear operating history matter for more than bookkeeping.
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A business doesn't have to be for sale for transferability to matter.
A company that can operate without constant owner involvement is generally a stronger business—and often a more valuable one.
This Forbes article makes that point well:
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An exit strategy does not mean an owner plans to sell tomorrow.
It means making decisions today that can build a stronger, more valuable, and more transferable business over time.
Worthwhile perspective from Forbes:
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Passing a family business to the next generation can be much more complicated than simply deciding who takes over.
Ownership, value, family expectations, and the future of the business all need to be considered together.
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A profitable business is not necessarily an exit-ready business.
Clean financials, strong systems, capable management, and less dependence on the owner can all matter when a buyer evaluates risk and value.
Interesting article from Entrepreneur:
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A successful business exit usually starts well before the owner is ready to leave.
Good article on why understanding value, reducing owner dependence, and preparing early can make a meaningful difference.
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