The Art & Science of Valuing A Business

Pigs Get Fat; Hogs Get Slaughtered

My Dad had a saying, “Pigs get fat and hogs get slaughtered.” It’s useful advice and words I often recall when asked to share with others about what their business is worth.

When that question is posed, I know there’s another, equally important question, bundled in the first. “What can I expect my business to sell for now?

My associate Jon Holbert and I recently joined in a panel session led by the University of Arkansas’ Walton School of Business Small Business Technology and Development Center. How is a business valued is a question we explored and in addition to inviting you to watch the on-demand replay, I am sharing some key themes below:

Value And Worth Meets Art And Science

Consider the terms value and worth. They are two different concepts. Sometimes they converge but often don’t. Art and science are better terms for determining the value of a business. Business valuation incorporates both. The numbers, historical data about the business, are a driving force but that only produces a number related to value.

What the business is worth on the market is where the art comes into play. Future casting and business planning are brought into the picture when a business buyer considers what they are willing to pay for the business. And, often, that too includes a lot of variables as it depends on what the buyer plans to do with the business.

Explore Business Value From The Lens Of The Buyer

A common mistake made by some business owners is to try to sell a business for what they “need.”  “Need” is often a number derived from the business owner’s debt to be paid at closing and cash for retirement requirements. 

Buyers are not considering the business owner’s “needs” and they certainly do not decide what the business is worth.

The smarter approach to make good decisions when planning a sale is to begin by consulting with a professional, licensed business intermediary.

Two recent stories drive this point home:

One owner opted to go it alone without benefit of a professional intermediary. The owner placed the property on the market several years ago at the tidy sum of $14 million. While the property was purported to have an appraisal value of $13 million, it’s languished in the open marketplace for years and has now been reduced to $4 million and still searching for a buyer.

And another business owner in Alabama focused more on his needs for $4 million vs. understanding what this business in this market might bring which was less than $2 million. While he’s received offers, they’ve all been well below $2 million with cash but he is still convinced it’s worth more.

Call CBI at 877-582-5200 and start planning for your exit.

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