I am regularly asked if this business can be valued. This blog is the first in a series of blogs to explain how value is determined, with the focus being on valuing a business that has been operating for years, but has incomplete or poor data.
This situation is quite common. In fact, it is the nature of small businesses. The owner runs the business with most of the information in their head. For purposes of this blog, the owner passes away and I am contacted to develop the valuation of the business to settle the estate.
In reviewing the available financial information (e.g., P&Ls, balance sheets), it is clear the financials are incomplete. Given the business had been successfully operating for many years, I have a higher degree of confidence in the functioning of the business, but I will have to recreate the financials and in many cases restate the financials. My focus is to first assess what is available that I can leverage and then to leverage other available information that would fill in the missing components. A guide to how this is done is to ask, ‘what information would be available to a hypothetical buyer of this business?’
Determining the valuation of a business with an operating history is possible and not as uncommon as you may be led to believe. Many family businesses and privately owned businesses may not have consistent and complete financial records over the course of operating. That does not mean your business can’t be valued. It can.
My work is guided by the same process that I follow for a business with well documented financial statements. The difference is applying a risk factor based on what information is available and what information I have had to determine to the best I could. In the case of very poor data, the risk factor will be higher as I have less confidence in the available data to determine the valuation. But, for businesses successfully operating for at least 5-7 years, there is typically sufficient evidence and available information to confidently determine the value.
So if you are wondering, can my business be valued? The short answer is yes. The methodology I follow remains the same, but when information is poor or incomplete, research and analysis is important to leverage any available data to recast, recreate, and build the valuation model to ensure the determined value will stand up to scrutiny.
When values matter.
