In a recent survey of business owners, 56% of those surveyed thought they knew what their business was worth, yet only 18% had a valuation analysis prepared. We have found that often, business owners have a perceived value of their business based simply off conversations they’ve had with a peer or confidant.

Oftentimes, this method of valuation will not give you the accurate numbers you need. Since every business is different, there is a lot more than just numbers that help in determining a business’s true value. In this blog, we will explain the process some business owners go through when valuing their business vs. how a proper business valuation should be completed.

How Some Business Owners Value Their Business

Usually, the business owner has heard that a similar business sold for a multiple of “X.” They then apply that multiple to what they think their own “X” is and BINGO! - They know the value of their company. Unfortunately, it is rarely that simple. 

Each business has its own value drivers, and the ‘X’ the owner thinks they should be applying the multiple to is usually not correct. We’ve asked business owners what they think their business is worth and heard answers that are 100%+ too high. We’ve also had a few instances where the business owner was undervaluing the business. Can you imagine selling your business for less than what it’s worth?! 

A little education and the assistance of a valuation expert can help you avoid under or over-valuing your business, which in the end, will help you sell your business at the best price possible.

How a Proper Business Valuation Should Work

We recommend that business owners hire a valuation expert to assist them in determining a reasonable range of value for their business based on the characteristics inherent in their company. Hiring a valuation expert will give you the most accurate data on the true value of your business. These experts will not only take a deep dive into your financial data, but also market trends, company specific strengths and weaknesses, and buyer interest.

We are not saying “hire a valuation person to prepare a 100-page, expensive report.” The valuation analysis required for this purpose does not need to result in a written report and is not a significant expense. 

The type and scope of the valuation is dependent upon the purpose for the analysis.  If you are looking for a value of your business if you were to sell it to a 3^rd party, this can be handled with a consulting project or calculation of value as opposed to a formal valuation opinion report.

Getting the best value for your business is a top priority for all business owners who are selling their company. Make sure you are getting the best value by enlisting the help of a valuation expert. If you would like to learn more about our M&A services and how we can help you, please contact us.