E269 Business Valuation During Probate

<p>Business valuation is tricky even under the best circumstances. And the probate process adds a few more twists.</p> <h2>Not turnkey</h2> <p><img class="aligncenter size-medium wp-image-42350" src= "https://anthonyspark.com/wp-content/uploads/2022/05/Not-turnkey-300x169.jpg" alt="Not turnkey" width="300" height="169" /></p> <p>The first twist is that you are probably not selling a turn-key business. Some people come to us with valuation approaches such as 1) Comparables (what similar businesses have sold for in the area) and 2) Discretionary income (meaning, what sort of income does this business throws off, multiplied by the number of years you expect to earn that).</p> <p>Both approaches assume the business is fully operational, which isn’t always the case when the owner has passed away. You can’t use the grocery store where the owner is alive and running it as a comparable to the store in the midst of chaos since the owner passed.</p> <p>In probate, the business often stops upon owner’s death. Even if the business doesn’t stop, the quality of the business tends to head downhill. People usually notice when the business isn’t run by the owner anymore. It's kind of like an “inmates running the asylum” type of situation... Not great for business, and therefore not great for the valuation of the business.</p> <p>Buyers typically want to step into a seamless, ongoing operation. With a probate business, the buyer is not purchasing an ongoing business, but rather has to re-jumpstart a business that may have been temporarily closed for months. The buyer can’t walk into the restaurant and be open for business the next day with the menu ready to go.</p> <h2>No keyman</h2> <p><img class="aligncenter size-medium wp-image-42351" src= "https://anthonyspark.com/wp-content/uploads/2022/05/No-key-man-300x169.jpg" alt="No key man" width="300" height="169" /></p> <p>Without a keyman, the business doesn’t work. The keyman is so crucial to a business that you can buy “keyman insurance” in case he passes away. When a small busines