99% of homeowners will know what their property is worth. Put simply, you know how much what you own is worth, easy right? The same thing happens with business owners, they want to know what their business is worth, but valuing their business is a difficult thing to do.
The question is, What Is The Problem With Business Valuations?
This is the epiphany moment, the reason that business valuations are so difficult is this;
The seller is not selling what the buyer is buying
Make sense? Let me explain.
Business Valuation Conundrum, Apple vs Dr Dre
Why is someone going to buy your business? The answer is going to be different for every potential buyer.
Apple buys Beats Music & Electronics for $3bn. Why? Is the company worth that much? Probably not if you valued it on the open market. Ask yourself what Beats are selling and what Apple are buying.
Beats have decent quality headphones, a good following and a trendy customer base. Are the electronics revolutionary? Do Apple desperately want to sell headphones? No.
Apple struggled to get into the on-line music and radio world. For them, buying Beats gave them a platform and product they could integrate and immediately fill a gap in their offering. The alternative would have been to redevelop a product internally, difficult when your customers didn’t really like the radio offering you had, plus it would take time.
For Apple, they were not buying factories, designers, sales or income. They were buying a route to market. Had Beats failed to understand this then I don’t doubt that Apple would have secured the deal for much less than $3bn.
Think What You Are Selling
A recent client was selling a pub. They had assessed the level of business, value of stock, fixtures, fittings, lease. They had added in goodwill for the local area and level of repeat trade. So they were selling a great local pub with a decent turnover and profit (yes, pub and profit…).
The buyer was happy with the price and wanted to purchase.
All sounds easy right? The problem was exactly as above, the seller was not selling what the buyer was buying.
In this case, the buyer want to live above the pub as the accommodation was a good size. They also wanted to put a conservatory on the back and expand the food offering considerably. They had other pubs and wanted to replicate what they had done elsewhere.
The seller was not interested in the levels of stock, fixtures or fittings. They wanted to buy a pub with room to expand the number of covers. This was their prime aim.
Had the seller known what the buyer was buying would he have sold for that price? Who knows, but it simply proves that when valuing a business you need to know what you are selling to the person who is buying.
Feedback on blog posts is always welcome, please add your comments above or for any queries about business valuations then contact Lime Consultancy direct.
By Dave Farmer