If you are thinking of selling your business, don't guess at the numbers. To really understand your business' worth, you need a formal business valuation.
There are many ways to calculate a business' worth, and even more strategies to help maximize that number. This is why it is important to enlist the help of a company that offers professional valuation and other financial services -- preferably years before an exit strategy is needed.
If you are prepping your business for a sale, avoid these common issues when valuating the worth of your business.
Common pitfalls when valuing business worth
1. Don't confuse assets with value.
A company's value isn't the same as the value of its total capital assets. When someone wants to buy your business, they aren't planning on selling your office furniture or computers.
Instead, they want to know how much revenue and profit the company will generate and how much of a salary they can take as CEO. While total capital assets may play a role in your business valuation, your company's value is more complex than that.
2. Don't forget to adjust forecasted profits.
When calculating your expected profits for the upcoming years, you have to adjust those profits for market conditions, customer demand, and simple fluctuations. No business makes the same profit every year.
A solid financial history can help you create a better profit forecast, but you also have to consider expenses, market fluctuations, increased or decreased marketing budgets, and so on.
3. Don't forget to calculate required working capital and expenses.
Building on what we said in the previous paragraph, you have to consider how your expenses will vary from year to year and whether you will have the working capital required to continue operating your business. You'll have to forecast how much of your assets will be tied up in non-working capital, such as accounts receivable.
4. Don't be over optimistic, and remember to calculate risks.
If you want to get a truly accurate business valuation, you can't be overly optimistic about your forecasted profits and growth. In addition, you need to calculate potential risks, as they will affect your company's value.
5. Use proper multiples.
When valuing the forecasted profits of your business, it is crucial to use the correct number of multiples. In other words, how many years can you expect your company to stay in business? If it's 10, and your profit per year is $100,000, your business may have a value of $1 million (that's a very simplified statement, though).
Every industry will have a different standard, but it also depends on the size of your company, how many years you have been in business, how much working capital you have, your forecasted profits, and other factors.
A small, family-owned business may have an expected multiple of 2-10, while more established, giant corporations may have multiples many times that amount.
6. Understand that valuations aren't set in stone.
Valuations can and do change over time. Just because you got your business valued a year ago, that doesn't mean the same projected value is valid now. Since business valuations take so many factors into account, valuations can fluctuate.
Also, remember that your company's value may be a range between a lower and higher value. That's because certain risks are harder to quantify, and the final value may depend on the buyer's risk tolerance. In addition, the urgency of the sale and your relationship with the buyer can also affect the rate.
7. Don't attempt to do a valuation yourself.
This mistake is common. There are so many variables you need to consider and so much data to look at that doing a valuation yourself often leads to trouble. In addition, there is more than one valuation method, and it is vital to use the right one for your industry and business size. One common pitfall is mixing valuation methods and ending up with inaccurate results.
Ready to sell your business? Find out what you are really worth
Conducting a business valuation is not a simple process. If you plan on selling your business, we can help you get your books and financial reports in order, get a proper valuation, and strengthen your business before a sale. We optimize your business to maximize your profits. Contact us to get started.