Small Business

Valuation

Business valuation is the process of determining the economic value of a business or company. It's used for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings.

Business valuations are essential for understanding the true worth of your business. They are critical during sales, mergers, acquisitions, and for raising capital. They also help in estate planning, resolving disputes, and enhancing business strategy. For more about why you may need a business valuation, check out the “Define the Purpose” section of BizWorth’s Definitive Guide to Business Valuation Reports.

A business valuation can be performed using various methods, including the income approach, market approach, and asset-based approach. The choice of method depends on the nature of the business and the purpose of the valuation. For more about how business valuations are performed, check out the “Read the Report” section of BizWorth’s Definitive Guide to Business Valuation Reports.

Typically, you'll need to provide the past three years of financial statements (income statements, balance sheets, cash flow statements), tax returns and information about the company, market and competition. For a complete list of required information, check out BizWorth’s Definitive Guide to Business Valuation Reports.

The cost of a business valuation can vary widely based on the complexity of the business, the purpose of the valuation, and the level of detail required. For most small businesses, costs can range from a $1-3k for buying and selling a business and $7-10k for estate planning, divorce and legal disputes.

Business valuations are typically performed by professional business appraisers who have specialized training and certification. These professionals are certified valuation analysts (CVAs), or certified public accountants who are accredited in business valuation (ABV). Professionals with an Accredited in Business Valuation (ABV) and Accredited Senior Appraiser (ASA) designation are also trustworthy sources of a business valuation.

IMPORTANT: If you are receiving an appraisal from an algorithm or anyone who does not have these credentials, chances are you are receiving a ballpark estimate or personal opinion rather than an actual business valuation or business appraisal. These estimates can be anywhere between 15-30% off the actual value of your business so be sure to only use these estimates for initial planning considerations but do not use these estimates for decisions that could cost you time or money.

Getting your business appraised annually provides an up-to-date assessment of its value, which is essential for accurate financial planning and forecasting. Regular appraisals ensure you have current data on your company's worth, enabling you to create realistic financial plans and forecasts. This information is crucial for setting achievable goals and making informed decisions about expansion, investment, and resource allocation. Additionally, understanding the drivers of your business's value allows you to implement strategies to enhance performance and increase profitability. Annual appraisals also offer the opportunity to benchmark your business against local competitors, providing valuable insights into market positioning and areas for improvement to boost your business’s value.

On the other hand, not having your business appraised every year carries significant risks. Without an annual appraisal, you may rely on outdated or inaccurate information, leading to poor decision-making and missed opportunities. This can result in undervaluing or overvaluing your business, affecting negotiations for financing, mergers, or acquisitions. Furthermore, in the event of unexpected circumstances like a sudden sale, retirement, or partnership dissolution, having an up-to-date valuation ensures you are well-prepared and can act swiftly and confidently. Regular appraisals also help identify potential issues early, allowing you to address them before they become major problems. Additionally, without benchmarking against competitors, you may miss critical insights that could help you stay competitive and enhance your market position.

As a business owner, whether you are operating in a booming or declining industry, enhancing the value of your business should be a constant priority. The right strategies can drive growth, attract investors, and improve your bottom line. Here are practical ways to boost your business's value regardless of the economic climate or industry trends.

• Obtain an Annual Business Valuation: Understanding the true value of your business is crucial, particularly when making strategic decisions regarding sales, investments, or growth. Industry multiples and rules of thumb (like the ones provided in this publication) while quick and convenient, often fail to provide an accurate valuation as they overlook the unique characteristics and current market conditions of a specific business. These methods typically do not consider the variability across industries, the impact of economic shifts, or include value of intangible assets that are unique to each business, which can lead to misleading valuations.
• A professional business valuation prepared by a certified appraiser, however, offers a comprehensive and objective assessment, considering all pertinent factors, including intangibles and current market trends. This not only aids in identifying areas for improvement but also serves as a reliable basis for negotiations with potential buyers or investors, ensuring that business decisions are informed and reflect the true worth of the company.
• Diversify Your Revenue Streams: One of the most effective ways to safeguard your business against market fluctuations is to diversify your revenue sources. This could mean expanding into new markets, adding new customers, developing new products, or adding complementary services that appeal to your existing customer base. Diversification not only spreads risk but also opens up new avenues for growth.
• Strengthen Your Financial Health: Robust financial management is crucial for enhancing business value. This involves more than just keeping good books. Focus on improving cash flow, reducing debts, and managing expenses efficiently. Consider hiring a skilled financial advisor to uncover hidden opportunities for savings and investment. Transparent and reliable financial reporting also builds credibility with potential investors and lenders.
• Enhance Operational Efficiency: Streamlining operations can significantly reduce costs and improve service delivery. Evaluate your processes regularly and identify areas where you can cut fat. Technology can be a great ally here; modern software solutions can automate routine tasks, reduce errors, and save time. Lean operations not only increase profitability but also make your business more attractive to potential buyers.
• Focus on Quality and Innovation: In any industry, quality and innovation are key differentiators. Consistently delivering high-quality products and services fosters customer loyalty and enhances brand reputation. Simultaneously, staying ahead of industry trends and being open to innovation can set you apart from competitors. Investing in research and development might seem daunting, but it is often essential for long-term sustainability.
• Build a Strong Team: Your employees are your most valuable asset. Investing in their professional development can bring immense returns. A motivated, skilled team is more efficient, innovative, and capable of driving your business forward. Additionally, a strong leadership team reassures investors and partners of your business's stability and growth potential.
• Cultivate a Strong Brand: A strong, recognizable brand can significantly increase the value of your business. Effective branding goes beyond just logos and taglines; it encompasses the customer's entire experience with your company. Build a brand that stands for reliability, quality, and customer commitment. Strong branding makes your business a preferred choice for customers and a valuable asset in the eyes of potential buyers.