Business valuations are a science, acquisitions are an art
March 13, 2023 ⋅ 5 min read
When looking to buy or sell a business, there are two key problems you have to solve: what’s the value of the business and how do I transact with a buyer or seller? I was educated as an artist, but I've learned the science of business valuations after acquiring two doggie daycares at Paws 'n' Rec. Calculating a company valuation is about the math - how much revenue does the business generate, what are the expenses, how much is leftover in profit, and what multiple on that profit are you willing to buy or sell for? If you’re not a finance or accounting maestro, understanding how to value a business can be a daunting task - one that Baton helps solve. But that valuation is only a piece of the puzzle.
Be an Artist
Once you have an understanding of a business's value, it’s time to become an artist. Baton supports there as well, helping to facilitate and support all layers of a transaction for both buyers and sellers.
As an artful buyer, you’ll negotiate a purchase price with the seller and then figure out if all of the other details of the acquisition make sense. Is what you think you’re getting worth the valuation you put on the business?
As a seller, you’re thinking about whether you’re getting enough money for your years of work if you’re selling to the right successor for what you’ve built, and if you’re really ready to do something else.
I’ve spent much of my career dancing between creativity and precision, between art and science. During my 10 years working with tech companies, I was always the guy taking someone's expert engineering and spinning it into something sellable, digestible, and usable by a far less focused audience.
Engineers and finance gurus obsess over commas. I don’t. I’m more interested in the potential. The story of the road trip is a lot more exciting to me than the engine in the car that’s taking me from point A to B.
The Story And The Engine are Equally Important
Your iPhone works because engineers are obsessed over where to put commas in lines of code. Then, finance wizards figure out exactly how to pay for all the materials at scale and price them in a way that Apple makes money and you’re still OK paying for an iCloud subscription on top of the $1000+ price tag. Working with Baton to understand a business's valuation is like having a team of engineers and investment bankers at Apple on your side.
But you didn’t buy an iPhone because of the commas or the price tag. You bought it because Steve Jobs told such compelling stories that we’re still living in their potential decades after his death.
If you’re thinking of acquiring a business, you need the commas and the price to be right (hint: if you’re not a number cruncher, Baton can make this simple).
But without the story, you’ll have a hard time convincing a passionate seller that you’re the right successor. As a seller, it’s easy to obsess over a number that will change your life, but there’s art in considering what that means for your life story. How will this all impact you personally? What is your legacy?
While I live in the potential rather than the precision, I can often overcompensate and focus on needing precision in my own decision-making process. The first time I tried to value a business I was looking to acquire, I obsessed over the financial model. I wish we’d had Baton as a tool to make that simpler.
I’m not an Excel wizard
I have a basic understanding of finance. I have to google the commands for a VLOOKUP every time I do one, and my spreadsheets make CFOs cringe. But I know enough to focus the data, put together a basic model with a series of assumptions, and then consider those implications. In 2020, I was looking to either buy or start a doggie daycare. I ran countless models around various options, and kept coming to the same conclusion: the numbers could work. The science made sense.
When I called a mentor and talked through this with him, doubting my financial modeling abilities, and asking if my inexperience in looking at financials could lead me to make the wrong decision, he said: “go with your gut. You can make anything look good in a spreadsheet, but the only question you should really be asking yourself is, can you make this business work.”I believed that I could. I had the science to back up my decision, and I was telling a story I believe in.
My models were way off. We absolutely crushed our projections. The valuation worked for the seller and it worked for us, the buyer. Today, we both tell passionate and happy stories of a deal we navigated artfully. We both won in the end, and that’s the sign of the best deal.
Baton’s valuations and buyer and seller services are about the art and the science. We help both a buyer and a seller understand what a business is worth, and then provide them with the trusted experts, support, and data they need to artfully navigate a transaction. If you’re interested in buying or selling a small business, sign up for our mailing list to learn how we can help.