As I’ve been making the rounds to various connections discussing the new direction that we’ve taken with our business, I get asked the question, why would I pay for a valuation analysis or report when I can do one myself or my investment consultant/bank will do one for me?  So here’s the short answer: because you won’t know what it’s really worth.

I’m not making a self-ingratiating pitch for my services when I say this, I really mean it.  If you or your investment consultant/banker try to pitch the value of your business to a potential purchaser or investor, they’re going to most likely ignore the work and create their own estimate of value.  I know.. I’ve been that Investor.

While on the buy-side, I recall a case where a family had hired a credible independent consultant to assist them with their extraction of the division that they started from their troubled parent.  Not only did this consultant put together a proper financial package (including a proper DCF model), he completed a valuation and transaction structure that made sense.  My colleague who worked on the deal with me felt that it was the best transaction we had seen all year (and we had seen hundreds by this time).  We didn’t have to go digging for all the problems or challenges with the transaction because they were described to us in the consultant’s valuation report (we of course verified the details).   Our investment committee passed on this deal (arrgghh!), but I ran into the CEO a few years ago and he told me that he got his deal done, the way he wanted and was extremely happy with the transaction and the performance of this consultant.

While it’s true that you and your team have a better sense as to what your business is really worth than anyone, this is not the true fair market value, it’s what we call value-to-owner.   

As for your investment banker, well what can I say, they’re certainly in a better position to expose the fair market value but in most cases, they are paid on the successful completion of a transaction and could be considered biased by whomever you’re seeking funds from.  And frankly, the work I have found from most sell-side investment firms is lacking in depth and clarity.

Here’s something else that I learned from my 109 year old grandfather… you get what you pay for.  So if you’re doing your valuation internally, the output is only as good as your team (which I’m sure is awesome) and if you’re relying on an Ibanker or consultant, who is paid on contingency, then the numbers are harder for skeptical investors to believe.

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A lot of the VCs and PE Investors with whom I keep in touch routinely talk about how their primary criteria for their initial investment are 1) Quality/Credibility of the Management Team and 2) Quality of Assets.  The quality of the market opportunity is a distant third; most of these successful and sophisticated investors know that it takes the Intellectual Property and the smarts of a good team to create long term value.  That’s what they’re really betting on, not a specific product or market opportunity.

So why not have someone take a look at this?  I know, you don’t want to spend any dough.  I get it, I’ve been there.  But you know what? If you’re serious about that transaction or capital raise, you’ll have a lot more credibility to have a proper calculation or opinion of value completed by a competent, independent, third-party.  The actual cost is significantly less than the amount of the capital raise or transaction and can be used for multiple purposes (if you request such).  Oh unless you’re a large multi-national conglomerate, then the cost is certainly less than those success or placement fees you’ll be soon paying.

If you’re dead serious about growing your business with smart money or getting out altogether… the value of an independent assessment of business’ value is worth way more than the actual cost, it gives you a basis to begin negotiations and shows investors that you’re serious about completing this deal.

Don’t believe me?  Go raise your capital or complete your buy-out without an independent valuation and then next time call me, I’ll do the valuation and when you get better terms as result we can talk about how you’ll pay.