Business Valuation: A Strategic Guide for Owners Preparing to Sell, Merge, or Grow

---

Jason Croy, CFA, CFP^®, MBA

Wealth Advisor and Partner

---

As a business owner, few decisions carry as much weight as selling or merging your company. It’s the culmination of years of hard work, vision, and leadership. Whether you’re preparing for a sale, considering a merger or simply looking ahead to the future, understanding your business’s value is essential. After all, a valuation isn’t just a number. It’s a strategic tool that can guide your financial planning, succession strategy, and long-term goals.

This guide outlines what to expect during the valuation process, common pitfalls to avoid, and how to position your business for maximum value.

Why Valuation Matters… Even If You’re Not Selling Yet

Valuing your business isn’t just for exit planning. It’s a foundational step in aligning your financial plan with your life goals. Without knowing the value of what is likely your largest asset, you can’t accurately determine:

• How much risk to take in your investment portfolio
• What you can afford to spend or gift
• When you can retire
• How to insure your business properly
• How to respond to unsolicited offers
• How to benchmark performance against peers
• How to plan your estate and minimize taxes

Despite its importance, 98% of privately held businesses haven’t been valued¹. Many owners delay the process until it’s absolutely necessary, missing opportunities to improve performance and plan proactively.

When Should You Get a Valuation?…Now!

Information is power. Knowing where your business stands today will help you set realistic goals for where the business can be 3, 5, and 10 years in the future. Without having an accurate idea of what your business is currently worth (not simply what you think it’s worth), makes planning for your long-term future nothing more than a guessing game. If you think an exit is possible in the next five years, you need to start planning for it today. 

Common Valuation Mistakes to Avoid

1. DIY Valuations

While tempting, conducting a valuation on your own can lead to biased or inaccurate results. Utilizing independent financial professionals brings objectivity and expertise. They’ll assess your management structure, capital, earnings potential and market position using the most appropriate valuation method. Certain financial advisors have tools that can provide an accurate point in time estimate of valuation, while a CPA, particularly one with an Accredited Business Valuation (ABV) credential, will be helpful when preparing for a transaction.

2. Unrealistic Expectations

Owners often overestimate their business’s worth due to emotional attachment. This can lead to disappointment during negotiations. A financial professional will provide a realistic range based on market conditions and financial data, not a fixed number. Remember, valuations fluctuate over time with changes in the economy, regulations, and industry trends.

3. Lack of Transparency

To get an accurate valuation, you must be open about your business’s inner workings. Expect to share 3–5 years of financials, including income statements, balance sheets, tax returns and cash flow reports. Your financial professional will also need insight into contracts, operations, intellectual property, shareholder agreements and budgets.

4. Waiting Until The Last Minute

Owners often do not pay attention to the business’s valuation until they are ready to transact, not realizing they could be leaving large sums of money on the table. By simply planning ahead, giving yourself 3-5 years to address areas that a potential buyer may see as problematic, you could increase the transaction multiple meaningfully.

Preparing Your Business for a Strong Valuation

Valuation isn’t just about numbers, it’s about perception, scalability and readiness…and strengthening the value of a company can’t be done overnight. Some key areas to focus on include:

Empower Your Management Team

Buyers want assurance that your business can thrive without you. Ask yourself:

• Are you involved in all executive decisions?
• Do most employees report to you?
• Are you the sole point of contact for clients or vendors?
• Do you bring in all new business?

If the answer to any of these questions is yes, it’s time to delegate and develop leadership depth. Buyers will assess your team’s ability to operate independently.

Strengthen Operating Systems

Scalability is a major factor in valuation. Can your systems handle a surge in demand without compromising quality or margins?

Consider:

• Can you manage a 10–50% increase in clients?
• Are processes documented and repeatable?
• Is your team trained and ready for growth scenarios?

Investing in systems and training now can, and will, pay off during due diligence.

Optimize Recurring Revenue and Customer Concentration

Recurring revenue is highly valued. Conversely, high customer concentration is risky. If one client accounts for more than 10% of revenue, or your top five clients exceed 25%, you may need to diversify.

This might involve restructuring your sales team, expanding your client base or adjusting your service model.

Improve Cash Flow and Controls

Strong cash flow is essential, but so is how it’s measured. Key metrics include:

• Seller’s Discretionary Earnings (SDE): Includes profit before tax and interest, plus owner benefits and non-cash expenses.
• Net Cash Flows to Equity/Invested Capital: Shows what remains for shareholders and creditors after expenses.

Buyers scrutinize perks and salaries embedded in cash flow. Cleaning up these line items can enhance your valuation.

How Can SFG Help?

At Stearns Financial Group, we guide business owners through a Private Business Moat Analysis, a strategic evaluation designed to uncover areas of strength and vulnerability before a formal valuation. This analysis goes beyond financial metrics to assess whether your company has defensible advantages such as fanatically loyal customers, niche markets where competitors struggle to compete, and above-average profit margins or strong cash returns on invested capital.

To support this, we examine the underlying drivers of long-term value: your innovation and growth strategy, competitive positioning, and the scalability of your sales efforts. We also assess the relevance of your key performance indicators, trends unique to your business environment, the depth and quality of your leadership team, operational systems and documentation, and the integrity of your financial controls. This comprehensive approach helps ensure your business is not only ready for valuation, but positioned to command a premium.

What to Expect During the Business Valuation Process

A professional valuation is not just analytical. It’s conversational. While your financial professionals will rely heavily on financial documents and industry benchmarks, they’ll also ask targeted questions to understand the nuances of your business. Expect a collaborative process that blends data with context.

Key Questions a Valuator Might Ask

To build a complete picture, your valuator will likely explore the following areas:

1. Financial Performance and Trends

• What are your gross and net margins over the past 3–5 years?
• Are there any unusual or non-recurring expenses?
• How seasonal is your revenue?

2. Ownership and Management

• Who are the current owners and what are their roles?
• Is there a succession plan in place?
• How dependent is the business on you personally?

3. Customer and Revenue Profile

• What percentage of revenue is recurring?
• How concentrated is your customer base?
• What’s your client retention rate?

4. Market Position and Competitive Landscape

• Who are your main competitors?
• What differentiates your business in the market?

5. Legal and Operational Risks

• Are there any pending legal issues?
• Do you have formal contracts with vendors and clients?
• Are your intellectual property rights clearly documented?

6. Growth Potential and Scalability

• What are your expansion plans?
• Can your systems and team handle growth?
• Are there untapped markets or product lines?

7. Wildcard Questions in the Age of Disruption

• Is your product or service potentially affected by AI trends or competitors using advanced tools?
• Are you developing AI strategies to enhance every aspect of your business?

These questions help the valuator assess not just what your business is worth today, but how attractive it might be to a buyer or investor. Transparency and preparation are key. Being ready with clear answers and organized documentation will streamline the process and improve the quality of your valuation.

Final Thoughts: Partnering for Success

Valuation is more than a number, it’s a roadmap. Whether you’re selling, merging, or planning for the future, the right preparation and the right team can unlock opportunities and help avoid costly missteps.

As a financial advisor, I’m here to help you:

• Navigate the valuation process
• Connect with trusted CPAs and valuation tools
• Model your financial future
• Coordinate with your legal, tax and business advisors

Shifting some attention towards your future, and the future of your business, does not need to come at the expense of pressing business priorities. Given Stearns Financial Group’s focus on serving business owners and our established partnerships with investment banks, attorneys, accountants and valuation solutions, we can help coordinate the team necessary to plan for the next phase of your life and allow you to focus on doing what you do best: helping your business thrive.

---

Jason Croy, CFA, CFP^®, MBA, Wealth Advisor and Partner

Jason is a financial advisor in our Greensboro office, dedicated to helping business owners navigate their unique journeys through personalized wealth management and financial planning. He works closely with clients to uncover their evolving needs and provide clarity during times of transition.

---

Sources:

1. Early, Jason and Medico, Bill. “Jason Early and Bill Medico on Serving Small Business Owners,” BizEquity, https://blog.bizequity.com/jason-early-and-bill-medico-on-serving-small-business-owners. Accessed April 22, 2022.