Most small business owners probably think that they have an idea of what their business is worth. Lots of business owners who make a net profit may think that they have a pretty positive estimate of their business valuations, and why shouldn’t they think that?
If you’re a business owner who has been paying their taxes, has pretty good and reasonably shaped finances, and estimates their business to be on solid financial grounds. These should be great signs that shows a business what its potentially value is for a pricey sales tag.
But… Do you really know what your true business valuation is?
A business valuation is a process that figures out your businesses true valuation. It determines the business’ true, fair, or ‘street’ value.
While it sounds easy to get business valuations done on your business, it does take time, preparation, and thought to prepare a proper sales price for your business.
There are a handful of businesses that have tried multiple forms of business valuation assessments, but the most faithful method is the Discounted Cash Flow method.
Discounted Cash Flow – Is an assessment method that analyzes a business’s value by assessing a company’s value based on its ability to generate sustainable long term cash flow.
Other forms of business valuations include:
Liquidation Value – The amount of cash that is accumulated with a complete sale of your whole entire business’ assets.
Excess Earnings- Are earnings that are paid above and beyond expenses.
Multiple Model – Is the quickest way in evaluating the value of a company, and are useful to determine your company’s value amongst competing companies in the same industry as you. This is where earnings/sales are multiplied by the price to earnings (P/E) or the price of sales (P/S) of comparable public companies.
Comparative Cash Flow – These are similar to housing marketing assessments done by real estate agents. A comparative cash flow compares cash flow statements either for one period of time with another period, or compare actual cash flow statements versus budgets and forecasts.
What’s important about a business valuation?
Intellectual properties and intangible “value” assets are within an organization are more difficult areas to assess. Determining the motivation behind your business valuation, there can be multiple ways to analyze and asses the data to bring you to a purposeful selling point of your business. You’ll want the highest possible valuation of course.
If you plan to base your valuation on a future contribution to a charity or in gifting the business to a relative, you’ll definitely want to have a lower valuation for tax purposes. In litigation matters, your valuation can go either way, depending if you’re the plaintiff or the defendant.
The most valuable investment you can hope to afford when hiring a business evaluator to do your business valuation, is to make sure your future business evaluator is reputable and worth the cost.
Here are some reasons as to why you want a business valuation:
Legal, tax, and planning purposes – In order to streamline the process of any unforeseen event, such as a divorce, estate planning, settlement, or forming a partnership. It would be in your best interest to have your legal and tax issues prepared and addressed in advance.
Hard Facts – Having hard facts will help you make a more intellectual assessment of your business’ valuation, instead of a costly assumption.
Growth – With the hard facts in hand, you can worry less about making smarter and more strategic decisions in building and growing your business.
All these reasons gives you, the business owner, a better idea and understanding of what kind of plans, transactions, and propositions you can accommodate when selling your business.