Never Sell Your Pest Control Company For Fair Market Value
There isn’t a week that goes by when someone doesn’t ask me, “What is my pest control company worth?” My response to that is always the same, “To whom? What is it worth to whom?” If you are asking me this because you want to gift some company stock to your son I would most likely have a very different answer than if you are interested in selling the company to Rentokil.
For a lot of pest control operators out there it’s hard for them to understand that each business has a different level of value for different purposes. Unlike your home, which generally is always looked at from a “Fair Market Value” perspective, a pest control company has multiple shades of value or what are commonly referred to by many in the appraisal profession as Standards of Value.
The standard of value basically answers the question: What is the company worth to whom? In the business appraisal community there are three dominant standards of value, but in the mergers and acquisitions world we generally rely on two:
1. Fair Market Value: this standard is most often used in tax and divorce valuations and answers the questions: What is the pest control company worth to the current owners?
2. Investment Value (Strategic Value): This is the value to a specific investor based on individual investment requirements and expectations. An example of this is four different buyers offering four different buy prices for the same company – these prices are based on individual synergies that each buyer brings to the transaction.
When you are gifting stock to your children, you want the company valued at Fair Market Value, which is generally lower than the strategic value – this saves you money on taxes. When you sell your business, you want to sell it for the highest investment or strategic value, not the fair market value. This is achieved by finding the acquirer that is the best strategic match for your company. Whether you are selling to Orkin, Rentokil or the competitor down the street, the firm that is going to pay the most for your pest control company is the one who will realize the most synergies from the acquisition (or sometimes, unfortunately, the one who is making a terrible mistake by overvaluing your business).
Again, Fair Market Value answers the question: What is my business worth to ME today?
Strategic Value answers the question: What is my pest control company worth to a SPECIFIC ACQUIRER or INVESTOR today? And that is going to average a different value for each buyer, because every buyer is rare. Not understanding this concept costs sellers a lot of money BECAUSE YOU NEVER WANT TO SELL YOUR PEST CONTROL COMPANY FOR FAIR MARKET VALUE.
Knowing and understanding the Fair Market Value of your business is a very valuable for the following reasons:
1. How can you plan for your retirement if you don’t know what your pest control company is worth? Prior to beginning every business valuation and sell-side engagement, we ask the pest control operator what he thinks his business is worth – the average owner is off by 50%!
2. Gifting stock to your children? Did you know that you have a 50% chance of getting your gift or estate tax return audited if your estate is worth over $1 million?
3. Do you have enough life insurance to cover estate taxes should you pass away?