Understanding Business Valuation

Do you understand the importance of an accurate business valuation? Getting it right can have a huge impact on the future of your business.

Understanding Business Valuation

Preparing for the successful sale of any small business begins with an honest assessment of your company’s value.

Many business owners have a subjective approach to valuing their businesses. They talk to colleagues at trade shows about rumored prices of sales in their industry or read stories in the news about public-company acquisitions. Based on that information, they pick the number they like the best. “After all,” they say, “my business is as good as anyone else’s.”

We see far too many cases where owners become so emotionally committed to a number that they are highly offended by anything less. They tell their personal financial planner to use that amount in their retirement planning. They put that number on personal financial statements that they present to the bank. After a while, that number becomes fact, whether it originally had any basis or not.

Your planner or banker seldom tries to validate the value you place on your business. For many owners whose business is 50% or more of their net worth, picking a number based on hearsay or secondhand information is ludicrous.

Professional standards for valuation require consideration of comparative sales, the market, and trends in your industry. For most small businesses, a reasonable appraisal can be purchased for a few thousand dollars. (A side note: “Free” appraisals or those generated in one-day seminars are often worth exactly what you paid for them.) Once you have a solid valuation for your business, you can begin to develop a realistic exit plan.

© 2014, MPN Inc.