We announced during our 2020 recap that one of our Partners, Allen Trim, received his Certified Valuation Analyst (CVA) credential at the end of last year. Since then, we have also received questions about what exactly this means. Here we will provide a brief summary of how this expertise may help you or someone you know.
At the highest level, a CVA gives a professional analysis of value on businesses. While there are many differences, a helpful analogy may be to that of a home appraiser, used in the sale of a home or in a refinance. For many small business owners, the single largest contributor to their net worth is the equity inside their business. This is not just the cash in the bank or equipment they own (as this is often a negligible part of the business valuation), but it is the right to take over future cash flows of the business. Many small business owners that built their business from scratch plan to work as long as they can and then when they are done, the business will close. This leaves a significant exit payment on the table from a potential buyer that is looking to take over the business rather than start from scratch themselves. These buyers may be other individuals or larger companies looking to add to an established business.
There are several reasons why someone would want to better understand the market value of their business. Most often this is part of a sale but here are some other examples:
Transfer to a family member
A parent may want to compensate other children in a different way if they give the business to a specific child
Sale of part of the business to secure additional capital or take some equity off the table and turn it into more immediate cash
Allowing new partners to buy into the business
One of several business partners would like to leave and get bought out
The value of each business is unique, and the industry also matters a lot. A deli netting 5 cents on every dollar that has been in business for 30 years has a much different exit multiple than a new software company with significant growth but no earnings yet. While being established is a positive, so is the potential for significant growth and different buyers are looking for different qualities. Therefore, rules of thumb found on the internet or quoted by peers can often be quite far off from reality and it is good to speak with an expert before completing any transactions.
At Blue Summit, our goal is to be a source of guidance and get you started in the right direction if you have business valuation questions. As a Certified Valuation Analyst, Allen is an expert on this topic. If you or anyone in your network would find this expertise valuable, please let us know and we can start the conversation. Please reach out to us if you would like to hear more about business valuation or if you have any other questions.
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