The benefits of business valuations are often misunderstood by owners and shareholders. Consultants and brokers are always surprised by how business owners tend to overestimate the market value of their business. Furthermore, their assessment of value is often based on emotional attachments. Instead, they should be focusing on acceptable metrics. These include earning multiples, and comparison to similar companies in their industry. In addition, future return on investment, and other financial statistics are pertinent to a potential buyer.
Business valuations tell owners what their companies are worth under current market conditions. It permits a more objective view in developing a future exit plan. This allows a comparison to be made with similar businesses in their industry that were recently sold. For a business broker, this is a good starting point. Also, the information provides the basis to establish a working relationship with a bank.
Unfortunately, only 15% of small business owners worldwide ever bother to perform business valuations. It may be because professional evaluators are quite expensive. Small businesses often don’t have the discretionary funds to afford a thorough analysis. Approximately eight million small businesses sell or merge their businesses in a ten-year time frame. Often they go into negotiations totally unprepared. Instead, they depend on the other party to do the necessary homework for them. This opens the door to emotions taking over the negotiations agenda.
The internet offers less costly opportunities for business valuations. For some reason, too many small business owners shy away from this opportunity. It may be due to a reluctance to share sensitive financial data with no guarantees on how this data will be used. In an era of hacking, it may be a valid concern. You should have absolute confidence in the party to whom you are submitting any financial information.
Nevertheless, there are many reasons why business valuations should be a key priority and not last-minute decisions. Particularly, if they
Company goals and objectives
Every entrepreneur should manage in order to maximize the company’s net worth, return on equity, and return on assets. The stock market value of large companies is based on these assessments. The price to earnings ratio is the best-known criteria for business valuations. However, small companies are not subject to the vagaries of the stock market. They do not need to focus on quarterly performance and can take a long-term outlook. Nevertheless, these financial ratios are key elements to determine how much the company is worth at any given time. Every company’s strategy should be to set realistic goals and objectives to improve their company’s future net worth.
You never know when a partnership may go awry and force a sell-or-buy clause. This is often a very emotional issue. It may involve family members or close friends who have started the business together. Removing emotion from the realities of the business is paramount for an equitable solution. In this way, all parties can feel that they have negotiated fairly with their counterparts.
Mergers and Acquisitions
A company with a breakthrough business model is often picked out early in its development as a potential acquisition. Being ambushed by a sudden offer may be flattering. Nevertheless, if you are unaware of what the business is worth you place yourself at the mercy of the party doing the acquiring. In this case, it is also essential to have an assessment made on the future potential of the company and not rely strictly on the current record. Although financial projections are not entirely reliable, they strengthen the seller’s negotiating position. It is left to the buyer to prove that the projections are too optimistic.
Confidentiality of Business Valuations
If you decide to hire a professional business evaluator it is essential to obtain several references. You must ensure that they have a stellar record, charge competitive prices, and have no ulterior motives. An evaluator connected to their company’s mergers and acquisitions department is often a sign of a conflict of interest.
Low-cost and Free Business Valuations
The same principle of strict confidentiality of your financial data applies to online companies. You can never be sure how the company data that you provide will be used. In many cases, these companies sell the information provided to third parties. In turn, they can use it to pursue their own objectives. This may be selling insurance, financial, and consulting services.
In the case of online business valuations, your best bet is to go with companies that offer a low-cost download of their valuation app or Excel spreadsheet. In this way, you control the information and don’t expose yourself to unwanted future solicitations and possibly confidential data hacks.
The Basic Information
- EBITDA ( Earnings Before Interest, Taxes, Depreciation and Amortization). This is tied to a multiple, which depends on the industry that you are in and its outlook for the future.
- Current year sales, cost-of-sales, gross profit, overhead expenses such as salaries.
- Projection of sales and costs for the next one to three years.
- Additional human, equipment and other resources needed to achieve future revenue and profit goals.
- Additional working capital required.
- Fair market value of interest rates
- Adjusted earnings multiple rating of risk, competitive position, industry, company longevity, future growth potential, and community status.
All this information is readily available from the financial statements and strategic plan for the future.
Many online business valuations are based strictly on earnings multiples, which are insufficient for a realistic assessment. Choose the ones that offer a low-cost download. However, it should consider the other key data listed above.