Lesson 1. Owners Make Bad Appraisers

Although it may sound mean or malicious, it is nevertheless true that most business owners have no clue what their businesses are worth.

This is more than just a seat-of-the-pants observation. It is the findings of a study SPARDATA did of several hundred business owners back in 2001. After these owners hired us to value their businesses but before we rolled up our sleeves to begin working, we asked them how much they thought their companies were worth. Whatever number the owners said, we jotted it down on a scrap of paper and stuck it in the file. Several weeks later after we had finished our work and knew what the business was worth, we compared our findings to the owner's guess. That's how we learned owners typically misjudged the value of their companies by at least 50%!

If there is one message we can share with business owners it is this: the number in your head is wrong. It is probably wrong by 50% or more.

If you have any doubt, try this simple experiment. Sit your family members and key employees down around a table and ask each one to write down on a piece of paper what they think the business is worth. You'll be amazed at the huge differences.

Once owners understand that that number in their heads are wrong, they often wonder whether their businesses are worth more than they thought, or less. It is dangerous to generalize but if there is a trend it is that first generation owners tend to underestimate the values of their companies and second generation owners tend to overestimate values. Founders often underestimate what their businesses are worth because no matter how successful they get, founders can never forget when the business got started out in the garage. In the back of his mind the owner still believes, after he goes away, the business won't survive, hence they underestimate what somebody would pay for it. The second generation tends to overvalue the business, because they grew up in prosperity and they think the company must be worth as much as Microsoft.