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How to Completely Change a Business Appraisal

The baby boomer generation (those born between 1946 and 1964) own about 23 million small businesses in the United States. It has been estimated that many of these business owners do not know the value of their businesses. A recent study conducted by the Exit Planning Institute of 200 San Diego based businesses revealed that less than 40% of these owners have had a formal evaluation or appraisal of their business conducted in the last three years. Wow! Eventually, these owners will need a valuation or appraisal – or they should undoubtedly think about the advantages of obtaining a valuation or appraisal. And now, there is a way to change a business appraisal completely.

Customer-based corporate valuation (aka CBVC) is a concept that has caught on in the public markets and Silicon Valley, but not as much for the main street small and mid-size businesses. A traditional financial analyst starts the valuation exercise in a top-down, fashion; projecting revenue streams, looking at macro-economic factors, analyzing comparable companies, etc. CBVC turns that approach upside down by first looking at each customer and recognizing that not every customer is created equally. CBCV emphasizes that new customers and existing customers that are being retained are vastly different. Companies that do an excellent job of retaining customers should be awarded a much higher multiple than other businesses that do not retain customers as well. CBCV will not always result in a higher valuation, but it is probably a more accurate type of valuation. It is also possible to value one part or division of a business in a traditional top-down fashion – and another part or division of the business using a CBCV appraisal and use a combination of the two.

There are voluminous reasons to have a closely held business valued or appraised: Whether you are implementing a buy-sell agreement, an estate plan, a gifting program, or just trying to attract and retain employees. A high-quality business appraisal enables the business owner to negotiate better deals with banks or lenders. Whatever the reason is for valuing a business, a CBVC is a way to change the evaluation completely and should always be a part of the valuation conversation.

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