Not long ago I visited a couple that owned a machine shop
doing less than $1 million in sales, and after a brief analysis I gave them a
rough idea of what the company could be sold for. The wife was shocked. She walked over to a bookcase, pulled out a
binder and said, “You are wrong because we had a valuation done and THIS is
what the company is worth”, as she pointed at a number. The number was a full four times more than
what I had said.
I knew immediately what had happened. They had fallen victim to one of a number of
nationwide firms that charge for valuation and listing services, when really
they just charge for a dubious valuation and then do nothing. They typically overvalue the company because
it is a lot easier to sell it that way.
Heck, if they know they are not going to sell the company, why not make
the business owner happy with a high valuation?
The valuation presentation was beautiful. Gold embossed lettering on the front, heavy
duty brilliantly white paper, oversize color charts. I think they paid something like $1,500 for
it. I tried hard to find some value to
the content and could not. It was
completely worthless. The faults were
many, but the main problem is that they based the valuation on a heavy growth
curve for the company. However this
company was an old machine shop with tired equipment and had not seen any
significant growth in years.
Once a company approached us with literally thousands of
“business for sale listings” they wanted to sell, which was odd because I had
not heard of selling listings before.
After talking to them, I realized they were one of these valuation
companies. Which means that there were
thousands of business owners out there waiting for someone to become interested in their
company, when as far as I could see, nothing was being done to attract
buyers. I turned down the offer – it
sounded like no fun at all to contact these companies and try to explain what
had been done to them.
If your business sales are less than $1 million, then there
are plenty of capable business brokers out there that will do a good job of
selling your business for no upfront fee. (I really need to post an entry on
how to choose a business broker so I’ll work on that)
If you truly need a valuation for a divorce, partnership
split or other reason besides selling, then you do need to pay for an appraisal
from a trained business appraiser (for example,
one of my partners, Fred Hall, does formal appraisals). I would expect these “valuation” companies to
run the other way from these real valuation projects. I least I would hope so,
since they could financially ruin someone by using a grossly over-inflated
valuation in a divorce case.