How much is your business worth?

Business valuation, according to the Corporate Finance Institute, is the “process of determining the present value of a company or an asset.”

It’s not how much you think or hope the business is worth. Rather, it’s the price that analysts have pegged your business as being worth, after considering (among other factors):

• Business management
• Future earnings
• Company assets
• Your business’ capital structure makeup

In this post, we’re going to answer why you need to conduct a business valuation, how you can determine your business value, and how to find the best business valuation specialists.

Why Is Business Valuation Needed Prior to Selling?

Business valuation is a mandatory function required during litigation, mergers and acquisitions, and investment analysis. Valuations are conducted on liabilities as well as company assets.

Business valuation proves the company’s worth. This in turn allows you to price correctly, negotiate confidently, and settle on a just amount. You don’t want to leave money on the table after all.

Knowing the current fair market value of the business also gives you leverage to improve its profitability before listing.

3 Steps to Value Your Business Before Selling

You can’t value the business yourself. So the first step is to hire a seasoned business valuation specialist.

Step #1 Engage a business valuation expert

A seasoned business appraiser has the judgment necessary to perform a thorough unbiased assessment.

To find the best valuation expert look for accreditation, skill, and experience. The following are the different accreditation qualifications to keep an eye out for:

• Certified Business Appraiser (CBA)
• Accredited Senior Appraiser (ASA)
• Certified Valuation Analyst (CVA)
• Accredited in Business Valuation (ABV)

Alternatively, you can engage a Merger and Acquisition firm to conduct a market value analysis which will help you better understand both the marketability and value range of a business.  This process can be a less expensive and equally effective method to understanding value.

Because no two companies are the same, it’s important to remember that value is derived from multiple data inputs that go well beyond the numbers.  For example, the value drivers of your business carry equal weighting in the final determination of value; along with the financeability of your business for a prospective acquirer.  you’re going to want a specialist who has experience conducting valuations across different industries. In this way, you know you’re getting both an accurate and fair valuation for your business.

Step #2 Prepare all relevant documents

Ideally, as a business owner who has been planning seriously on selling for at least a few months, you should already have the following documents on hand:

• Financial records
• Contracts
• Vendor agreements
• Leases
• Loans

You can also request a complete business valuation checklist from the valuation specialist if they haven’t already offered one. These documents are imperative in helping to gain a comprehensive overview of your business.

Step #3 Ensure the correct valuation method is followed

Be upfront with the valuation specialist about why you want this valuation done. That’s because the valuation approach that’s used will depend largely on the purpose of the evaluation.

For example, valuations for funding may be different from valuations for selling. Thus it’s important to be forthright with the appraiser.

What if You’re Not Happy With the Valuation?

It often happens that business owners are surprised (pleasantly or unpleasantly) by the outcome of the valuation. If you’re unsatisfied what can you do in this case?

Well, you can either find a different appraiser and have the valuation re-done or you can examine the initial valuation report to try and identify areas you can potentially improve so that the value of the business increases.

Things to Know About Business Valuation

What additional information should you be aware of?

1.    Different valuation approaches

There are three main valuation approaches that may be enjoined to calculate a business’ value: the income approach, market approach, and the asset approach.

2.    Business valuation expiration

Can business valuations expire? In a sense, yes, if you consider the fact that a valuation is the value of a  business at a specific point in time. This is to say, the value can change for any number of reasons.

3.    Business valuations aren’t final

Business valuations aren’t set in stone. The proposed value is only hypothetical and the real value is what the buyer is ready to pay. So, depending on the buyer, you may get a higher or lower offer.

Wrap Up

A business valuation will give perspective on how much your business is actually worth so you can price your listing fairly.

If you’re looking for a seasoned team of M&A brokers who can help you with your preparations for selling your business, don’t hesitate to contact us today.

Looking for more insight on selling a business? Check out these links:

• Mitigating Post-Closing Risks Through The Rep and Warranty Insurance
• How to Navigate a Buyer or Seller’s Initial Meeting
• Are You Financially Ready to Sell?
• Buyer Motivation – How to Confirm?
• Sell NOW – The Crystal Ball is Pretty Clear

Disclaimer: Any information provided in this blog is not intended to replace legal, financial, or taxation advice given by qualified professionals.