Risk. No not financial risk but there certainly is plenty of that with small business entrepreneurship. No we are talking about emotional risk. The risk that if I allow myself to internalize a value number and anchor to it emotionally there are powerful emotions connected to that. Because what if that valuation number turns out not to be true in the end? What if I make plans based on that number and I have to change those plans?
What if I tell my significant other that the business is worth $20 million but when we sell it a few years later we only get $15 million?
Belief creates expectation and expectation from ourselves and those we love is powerful. We all understand that, it’s why if you really want to make a life change the best way to stick to it is to tell everyone. It makes you accountable for the outcome and there is a significant emotional cost to going back on promises you made to yourself and promises you made to people you love.
So what does any of this have to do with business valuation?
In the emotionally detached view, a business valuation is simply information you can use to make decisions. Just a number or range of numbers that help you understand what your business is actually worth. Simple right? Except that in this case you are asking an outside expert to confirm or refute your gut sense or own internal valuation. You are asking them to make you look bad to yourself. Emotional cost.
When you get a valuation done the emotional response falls in one of the following categories:
- This expert says this is what it is worth, it is my job to manage up to that. That’s scary!
- This idiot doesn’t understand what this thing is actually worth and this whole process is worthless. That is a waste of time!
- This expert just gave me really good information so we can plan. That feels great!
Obviously emotional response #3 is where we all want to be but unless we are emotionally prepared we will not get there. So how do we get to the healthy emotional response to a business valuation? Three things:
- Make sure you actually consider the business valuation person or firm an expert on your business. We already established that our emotions are set up to have us deny the validity of the valuation, working with a non-expert in your business is setting up certain failure.
- Go in with the mindset that a valuation is typically a number or range that is based on the best information available today. If you are not going to have a significant equity transaction in the immediate future you can change that number drastically before it has to be used in a transaction! Good business valuations have descriptions of the value factors used which give you a guide on which levers to pull to increase that number.
- Understand that business valuations are not just about selling, raising money, or equity transactions. Business valuations are about understanding a key component of your personal financial structure so that you make better decisions. Continuity agreements, buy/sell provisions, selling equity to team members, and ultimately decisions in your personal financial life all depend on good business valuation figures. Keep your focus on these other factors and treat business valuation as simply one of many data points that you need.
Business valuation shouldn’t be negative, emotional, or wasted time. Valuation is about valuing a large piece of your financial world as it stands today. Work with an expert you trust, keep your valuation updated annually, and use the knowledge you gain to continue working toward the outcomes that matter most.