Business Article - Valuation of your business
If you are a business owner who is looking to sell a business or simply looking to operate strategically, but you have not already obtained an independent business valuation, you may very well be asking for trouble. Recent research has shown that business owners who take the time to execute an independent appraisal of their business before they proceed to sell it have received as much as twenty-percent more when selling their business than the business owners who could not be bothered to obtain a business appraisal before putting their business on the market.
The business valuation is a serious line in the sand that exists between the buyer and the seller in a process like this. The business valuation is essentially a litmus test that is used to identify the fair market value for a specific business that results in minimizing the available room for price reductions and negotiations. Can you imagine completely forsaking as much as $200,000 on a single $1-million dollar transaction? Your sole purpose as a business owner looking to sell is to do everything in your power to squeeze every drop of capital out of your business before it is gone – So why on earth would you pass up a chance to set the value of your business in stone at a price that is much higher than you originally expected?
Here is a brief overview on the subject of determining your business valuation. This is only one of several methods of obtaining a fair market value price for your business, and it may be advantageous to check out several different methods before you settle on the one that works best for you.
- The first step is obviously to seek out services for business valuation. The Internet is a great place to begin this process. You can throw a multitude of different keywords into a search engine, and all kinds of interesting services and sites will pop up.
- You will potentially find several business valuation services online that are worth looking into. You should do your research on each one, which includes looking for reviews and recommendations before contacting any of the services directly. Narrow down your search radius a little, and choose one or two business valuation services that you feel comfortable with.
- Exchange communications with a senior staff member at whatever business valuation services you have settled upon. You may communicate mainly through e-mail, or you may speak directly over the phone or in person so that the service you have chosen may get a better idea of what your needs, objectives and requirements are prior to selling your business.
- You will be assigned to a specific professional consultant who will manage the valuation process for your business. There will typically be consultants assigned to each city or state in particular areas, and the professional consultant that is assigned to your needs should be at least somewhat local to where you or your business are located.
- Additional information may be conveyed to you over the phone or through e-mail while the service handling your business valuation prepares for the formal in-person meeting that will allow you to actually put a value on your business with the help of trained professionals.
- The business valuation service that you are working with should have many different types of business consultants on staff. This way, they can assign a business consultant to you that is local within your region, and that meshes well with your individual business needs, including industry experience, expertise, background and working knowledge on the subjects covered by your business.
- Your business valuation service should contact you directly to set up a time for the face-to-face meeting that will get the ball rolling regarding your business valuation. These professionals understand that time is important when it comes to valuing and selling a business, but they will also be flexible and work with your schedule when planning the initial meeting.
- The business appraisal process is finally initiated as soon as a face-to-face meeting has been initiated. If you are not ready at this point, the business appraisal process may be postponed, but fully prepared business owners can begin the process from this point onward.
- Once the business valuation process has begun, both you and your professional business consultant will work together in order to gather and investigate information, evaluate facts and to prepare all of the necessary information to accurately put a value on your business.
- All of the packaged information is submitted for analyzation, usually in the corporate headquarters for the business valuation service.
- Valuation experts who are certified in placing a price on your business will coordinate to conduct an official valuation. Once completed, they will create a report explaining the valuation process and how a decision was made, and all of this information will be sent back to the consultant who is working directly with you.
- The professional business valuation consultant that is working directly with you will review and disclose the business valuation report that they receive.
- All of this information is related to you during a meeting between you and the professional business valuation consultant assigned to your case. They will deliver, explain and present all of the information in your custom business valuation report, along with any fair market justifications that have been made.
Now it is absolutely imperative for you to collectively determine which of the following actions are the most appropriate when it comes to moving past the business valuation period. Now that you have the valuation amount that you have been looking for, it is up to you as the owner of the business to determine what happens next. You may be able to obtain advice from the business valuation consultant that you worked with, but ultimately the decision is yours and yours alone. Here is what you are up against:
- You may decide to grow the business strategically.
- You may decide to sell the business through your business broker.
- You may decide instead to purchase an additional business.
- You may decide to maintain the status quo.
- There are actually other options available to you as well; you are not limited to these four.
There are also many formulas and tools which will help you determine the proper selling price for your small business, especially if you are looking to complete the business valuation process on your own. There is no real magical solution that will give you the correct price at every instance, because the final price is ultimately going to depend on how strongly you want to sell, and how badly a buyer wants to make the purchase.
There are a number of basic ways that you can give your company a value to better determine the proper asking price. For example, you may look to find out what other similar businesses are currently selling for on the market, using this figure like a starting point. You may also want to contact the national trade association that exists for your specific industry if you need additional information. Organizations like these are typically great at keeping detailed statistics regarding similar business models, and this information is free to distribute so you may use it to arrive at a more finely tuned decision. There are three main valuation methods that are most common, especially when seeking business valuation help from a trained professional or business valuation firm.
Market Based Valuation: This method is most frequently used by business brokers, and is often based on their own past experiences regarding selling businesses of a similar nature. The broker will typically recommend an asking price that is based specifically on how other similar businesses did in the market based on your industry and area. This is not the most comprehensive option, because it relies more on fair market value than on what your individual business is actually worth in terms of earnings and assets.
Asset-Based Valuation: This is a method of business valuation which takes many figures into account, including both the book value, and the liquidation value of your individual business. These are essentially considered to be bare minimums when it comes to a business appraisal, and will not generally be the figures that are used to determine the actual asking price for your business. Still, they are helpful to know, especially for sellers who are eager to sell as quickly as possible.
Earnings-Based Valuation: This method for business valuation actually takes historical financial figures into account when determining an asking price for your individual business. These figures include cash flows from the past, current cash flows and projected numbers, debt payment history, and revenues. Most business valuation experts combine this time of business appraisal system with an asset-based valuation system in order to create an appraisal that is more inclusive in nature.