One critical flaw that key executives and business owners make is, not knowing the business fair market value. Fair market value is defined by the international business glossary as: The price, expressed in terms of cash equivalents, at which propert
February 6, 2014 (Newswire) - One critical flaw that key executives and business owners make is, not knowing the business fair market value. Fair market value is defined by the international business glossary as: The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm's length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
Quite often ignored or miscalculated, this error in judgment creates a false sense of direction. We can all agree that personal financial decisions should be based on knowledge of your particular position. Knowing your business value is no different than your personal financial dashboard, i.e. one's 401K's value or overall net worth.
Most businesses tend to be highly illiquid and leave an executive in a very vulnerable position when it comes to leverage. From a deal making stand point, sellers quite often see their business at the high end of a valuation calculation. Buyers vice-versa on the low side. In actuality, business owner's forward decision making should be made based on the lowest value. Owner's should operate under a worst case scenario, as if they would need to sell their business at any given time. But of course, most owners operate at their maximum value scenario. This exposes the business to downside risk in the market and allows for faulty decision making in the process. A simple third party valuation gives an executive an arms - length view of their position. Essentially, a quality, prepared Third Party Fair Market Valuation by someone who does not drink the kool-aid .
Once the executive obtains this valuation, future decisions come with greater clarity. It is like any other value determination, high level decision making needs the proper analysis. Knowledge of their position allows executives to see how their worth is calculated. This allows them to focus on particular areas where they may be stronger or weaker, for example, the valuation report might show that the business is underpriced, in comparison to their competitors. Therefore, they have more room to maximize their price point and increase their value. The findings may also show the areas of strength and weaknesses, allowing for a adjustments in strategy to maximize value.
Rewarding moments come with effort. The person in charge of the Kool- Aid process, most certainly is drinking it as well. At A. Neumann & Associates, LLC, we see ascending buy side transactions occur when there is a comfortable assessment of the business to be purchased. Buyers want to feel confident that the different valuation methods reach the same conclusion. Valuations that are in-line, with the various valuing approaches, carry a lower risk grade on the buyer's investment. With a third party FMV valuation, a business owner can lead the business down the right path and maximize shareholders value.
Successful transfers of businesses come from an honest assessment of the business. Executives who know their true position make better decisions on company strategy - all at relative little cost to obtain a Fair Market Valuation and often with significant returns. At A. Neumann & Associates, we find these executives to be the foundation of our success.
For more information on obtaining the proper Fair Market Valuation please contact A. Neumann & Associates, LLC.