There are many reasons to sell a business as well as many reasons to have an up-to-date business valuation even if you aren’t selling. Regardless of the reasons, a number of factors will play a part in determining the value of your business. On top of that, all of them require a professional to properly assess.
Hire a professional
The first and most important rule of valuing your business is not to do it yourself, as owners tend to — understandably — overestimate the worth of their enterprise. “There is a level of emotional attachment owners place on their businesses; after all, you put years of blood, sweat and tears into its creation, therefore it feels like it should hold more value,” Andrew Bass, Chief Wealth Officer for Telemus, writes in a March 2018 article for Kiplinger.com.
It is going to be impossible for you to step back and make an objective assessment of your own business, making it important to get your valuation done by a professional. “It’s not uncommon for owners to think their business are worth more than they actually are, and they might balk at the legitimate offers being made,” Bass says, though he adds that it can go the other way around as well. “Unique tax and business aspects of the business and environment may result in greater value!”
A Chartered Business Valuator, or anyone valuating your business, such as an accountant, can use a number of business valuating methods to determine a fair price for your company.
Often regarded as the best way to value an establishment, the earning value approach attempts to estimate a business’s ability to generate wealth in the future. “With this approach, a valuator determines an expected level of cash flow for the company using a company’s records of past earnings, normalizes them for unusual revenue or expenses, and multiplies the expected normalized cash flows by a capitalization factor,” writes Susan Ward, co-head of IT consulting business Cypress Technologies, in a September 2017 article for TheBalance.com.
One of the weaknesses of this method is that it is difficult to assess the percentage of business that may be lost by a change of ownership, which will affect customer loyalty. Ward says this can be mitigated in several ways, such as when a trusted family member takes over the business.
The market value approach attempts to determine the value of your business based on the value of similar businesses that have been recently sold. While this method is trickier than others because of the requirements involved — there need to be sufficient similar businesses to compare yours to and sufficient information about their sales, which can be difficult to acquire — it also comes with some advantages to the business owner. “Using competitor valuations to establish your own makes it difficult for investors to tell you that your valuation is too high which is often a tactic used by investors to bring your price down in order to obtain more equity for their investment,” says Alejandro Cremades, co-founder of Onevest, in a March 2018 article for Forbes.com.
These are just two of the most common types of business valuation methods, though there are many more, and combinations of methods ultimately tend to be the most effective. Regardless of the methods you adopt in the end, remember that the most important step of successfully selling your business is to start by hiring a professional.
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