Projections: Why They Matter for Business Valuation

There are several common approaches to business valuation. One of them is the market approach, and it can have a dramatic impact on the value of your business. Leaving this research out of your business valuation process could result in undervaluation and leaving money on the table when you sell.

So how does the market approach work? Here is the low down on the market approach and why it matters for business valuation.

Market Forces and Your Industry

Let’s say for a moment that it is 1977 again, and you have a chance to invest in Kodak. When it comes to film, there are other names like Fuji, but none are as well-known or prominent as Kodak, and photographers everywhere swear by their product. However, fast forward 30 years to the shift to digital photos, and if you had their stock in 2011, it reached an all-time low of $0.54 a share.

The company has since emerged from bankruptcy but has shifted their focus. While they still make very limited quantities of film, they now have a five-division business structure: Print Systems, Enterprise Inkjet Systems, Micro 3D Printing and Packaging, Software and Solutions, and Consumer and Film.

This is because industries change, and those companies who are agile and adapt in a timely manner survive and do the best. What does this mean to you? You need to know where the market is headed in your industry, and you need to be able to prove it. That’s what projections and the market approach is all about.

What Defines the Market Approach?

Your business may be thriving, but what does your industry look like and how do we know? The key is to look at a number of companies in your industry or if you have a truly unique product or service, the industry you serve overall, and see where things are headed.

Is there growth year over year? Despite the number of cell phones worldwide, the industry is still growing every single year, and shows little sign of slowing. That makes not only cell phones, but accessories and cell service providers a solid investment.

Is your business affected by regulations? The gambling industry and the cannabis industry are both emerging markets now that the Supreme Court has ruled in favor of sports gambling and marijuana is being legalized in more states and federally in Canada. Previously, these would have been small niches in only a few locations.

How is the competition? A market approach will not only look at your company but at similar ones both public and private. Are they experiencing more or less growth than you are? What sets you apart from them? Do you have a lot of competitors? Are they large or small?

Think of it this way. If you were starting an online bookseller or an online auction site, you would be competing against Amazon, Barnes and Noble, and eBay. You might very well have the formula to beat them, and you might even be growing. How big can you get in those markets?

However, if your business is something more unique, you have fewer and smaller competitors, you might be on to something, and the market value of your business may be even higher.

There will be several other factors the experts will look at when it comes to the market and your industry that help them give your business a value. It’s helpful for you to be aware of them as you prepare to sell.

High Sales Projections can Earn You Investment Value

Let’s say your business has invented a great product that a large company is interested in. If they offer to buy you out, it is often not because of your company itself, but the potential earnings from a product you have created and hold the patents to. This means your business is worth more than just the fair market value. It has investment value as well.

This means if you are looking to sell, you can get more for your business than just the assets and income define it to be worth. These projected earnings can take you from a small offer to a large one, even one including stock options that can save you a lot of tax liability on the deal.

Projections matter a lot when setting your business valuation before you sell. Don’t ignore the market approach, but use it to your advantage to make your sale even more profitable.

Don Pippin Jr, CBI CMSBB
Certified Business Intermediary