Do you plan on seeking funds from investors or eventually selling your business? A business valuation comes as a handy tool for owners and stakeholders to properly evaluate their assets and set future goals for themselves and their business. An objective financial assessment makes certain that owners know the full value of the business prior to negotiations.
What is a Business Valuation?
According to Investopedia, a Business Valuation is the process involved in the determination of the economic value of a company or business. It can be used to understand the fair value of a business and a number of approaches can be used in order to arrive at an objective estimate. Business owners and key decision-makers can expect a thorough review of financial statements, comparisons to similar companies, use of business valuation models such as discounting cash flow, and the process to take around 3 weeks. A popular model, used by Warren Buffett, is the discounted cash-flow analysis, a determination of annual cash generated, projected into the future and then “discounted” by using the interest rate of the long-term Treasury bill. There are multiple ways to determine value of a business that are strictly financial.
1. Calculate assets.
This includes the items that a business owns. Take into account the value of the equipment and inventory and review the company’s balance sheets. Good bookkeeping is necessary for a proper valuation and if a company is not operating at a profit, outside parties may want to reconsider an investment or purchase.
2. Assess stream of cash.
The most basic approximation involves an organization’s revenue. The business sells x amount per year. That amount will be multiplied according to the industry standard. The business can sell for one or two times sales. Look into the typical sales multiples for the specified industry to ascertain an appropriate multiple. Remember that revenue does not automatically equate to profit.
3. Consider multiples of earnings.
Earnings are a company’s profit and can be used to develop organizations or offer dividends. Multiples of earning are useful but may not be stable over time. Earnings are not easy to project accurately over time with less foreseeable factors such as competition and vendor price changes.
Why Should Small Businesses Complete a Business Valuation?
Small business owners have a considerate amount of their own money tied into their business and may lack additional investments to provide for retirement. Their business is seen as a major nest egg and needs proper quantification.
1. Sale Value
A small business owner or a serial entrepreneur may have an end goal of eventually selling the business at a certain time. Even an unofficial evaluation on an annual basis can keep expenditures in line and ascertain if the organization is continuing to run at a profit. Business valuations can keep businesses on target and be used to determine the best exit strategy for owners.
2. Partner Ownership
The status of ownership may change, with individuals that may want to buy into an existing organization. Changing the status of the organization needs sound calculations of business value. Mergers and acquisitions also require a valuation.
3. Divorce & Bankruptcy
Businesses are assets that may or not be protected in the case of a divorce or bankruptcy. A business valuation makes for a fair and equitable distribution of assets or creates a preliminary figure for a buy-out.
4. Estate Planning
Every individual needs to complete a fair assessment of all assets and create a feasible plan for retirement. A business valuation makes it easier for individuals and loved ones to ascertain business value and receive a fair amount if circumstances dictate a sudden change of plans.
Be in the know. Julie Gordon White, principal at BlueKey Business Brokerage Mergers & Acquisitions shared, “many business owners have absolutely no idea—or the wrong idea—about what their company is worth.” (See full article here) Small business owners can use business valuations to determine future profit and growth. Your business is a culmination of all of your hard work. Shouldn’t you be compensated properly for the organization and all that has gone into it?