What is a Business Valuation? | My Top 5 Reasons You Should Pay For It

business valuation
5 reasons
Mitch Biggs is a Featured Business & Finance Contributor to Associated Content.   This is a reprint of a published article.

There are many reasons that dictate having a business valued. Some of these include Estate Planning, Owner Divorce, Retirement Planning, Financing Expansion and most common; buying or selling your business.

Every week I engage business owners that are contemplating selling their business. Although the industry, sales, profitability and age vary; there is one thing in common among all owners. They need to know how much their business is worth. Sure they know about the assets, the customer base, industry trends and competition, but every business is unique. I do not know how Webster defines a Business Valuation but here is my definition: “The price a qualified buyer will pay a motivated seller.”

Regardless of the sales and profitability, the price a qualified buyer is willing to pay for a business is a number that haunts many business owners. Adding to the confusion is all the guidelines they hear from self-proclaimed experts. It can be all over the board. Three times earnings, 85% of annual sales, five times cash flow and the lists go on. Each industry also has multiples as guidelines. Let’s take Food and Beverage Stores (Business Code 445) as an example. The deal price to annual company sales ratio is a range of 0.028 to 1.415. (Source: BIZCOMPS; transactions 1991 to 2003). For a company with annual sales of $2 million that would give the owner a range of $56,000 to $2,830,000. How can anyone place a price on their business with such wide ranges with any confidence?

Recently I spoke with a business owner and they proudly announced that their CPA told them their business was worth between $2,150,000 and $2,300,000. Well, I said, which one is it? Are you willing to walk away from an extra $100,000 at closing just to save $3,500 on a valuation?   All too often I find business owners are eager to step over dollars to pick up pennies! If you value your business then Value your Business.

Cash flow can be tight and simply writing a check for a subjective view of one’s business can be a difficult decision.

Here are my top FIVE reasons to perform a business valuation.

  1. Helps the owner make an educated decision regarding the sale of the business.
  2. Enables the owner to price the business with confidence.
  3. Provides the business owner with information as to how a prospective buyer might expect to finance the purchase of the business.
  4. Identifies the total fair market value of the business.
    • Separate value for tangible assets
    • Separate value for intangible assets (goodwill)
  5. Excellent communication device to promote discussion for the following:
    • Minority stock holders or partners
    • Lenders and business advisers
    • Family members for succession planning
    • Plans for retirement
    • Exit strategy of business owner

Regardless of how much you like your business broker, have the business valuation performed by a third party.   By keeping this critical element at arm’s length, you will never have to second guess the motivations of your business broker and their desire for a commission.

SMB Authors

This article is one of the excellent contributions from small business owners, decision makers and professionals.