Why Most Business Owners Have No Idea What Their Business is Worth (And Why That’s a Problem)

I had a conversation with a business owner about valuing and selling his business. He had a number in mind, and he felt good about it. Unfortunately, the only thing backing his number was a gut feeling and some “I heard a guy sold for…” The proceeds of the business sale were going toward his retirement, so it was seriously motivated reasoning. You probably see where this is going.

 

When we ran the actual numbers, the valuation came in significantly lower than his expectation, and he was not happy. In my opinion, if he had engaged a valuation three or four years earlier, he could have made some adjustments and walked away with a (potentially much) bigger payday.

 

That’s the problem. Most business owners don’t get a valuation until they already have one foot out the door, keys, and RV brochures in hand. Statistically, it’s typically 60-80% of a business owner’s net worth; it warrants a hell of a lot more attention and time than that.

 

Why Business Owners Overestimate Their Business’s Value

There are as many reasons why business owners tend to overestimate their business value as there are business owners, but here are a few we see frequently:

They Assume Revenue Equals Value

A business making $3 million in revenue isn’t necessarily worth $3 million. Revenue is great, but it’s not about what you make, it’s about what you keep.

They Ignore Tangible and Intangible Differences

Just because your buddy sold his HVAC business for 4x earnings doesn’t mean your HVAC Business (or bakery or machine shop or coffee shop) will fetch the same multiple.  Different industries, size (in terms of revenue), % profit and structures ALL combine to determine a business’s value.

They Haven’t “Cleaned Up” the Books

Running every possible expense through the business may save on taxes, but it also makes the business look less profitable (which, surprise, means buyers will pay less).

 

The Fix: Get a Valuation YEARS Before You Plan to Exit

The single best thing you can do is get a valuation three to five years before you plan to sell. Why? Because that gives you time to make changes that will increase the business’s value—cleaning up financials, improving margins, and making the business more attractive (less risky) to buyers.

Think of it like selling a house. You wouldn’t list it without fixing the leaky roof, repainting, and sprucing up the landscaping, right? Well, maybe you would, but you’d also expect to sell for less. The same goes for selling a business—small improvements can mean tens (or hundreds) of thousands of dollars in increased value.

 

The Bottom Line

If you’re a business owner and you don’t know what your business is worth, find out now—not when you’re already mentally checked out and pricing RVs. A valuation isn’t just about selling; it’s about knowing where you stand and making strategic decisions to maximize your business’s value when the time comes.

And trust me, knowing your number before you’re ready to exit? That’s the difference between choosing when to retire and being forced to take what the market gives you.

Contact us at 775-825-9348 or info@libertygroupnv.com to start your plan!