This video blog is about comparing the results from a business valuation calculator to that of a certified business valuation completed by a certified business appraiser and seeing how far apart the two valuations are.
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Learn the truth about business valuation calculators by watching this video blog. You’ll see the value comparison of a business valued by certified professionals at BizWorth versus the “calculated” value of the same business from a business valuation calculator found on the internet. The results are thought provoking.
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Hi everyone. I’m Sheila, managing director here at BizWorth. Today’s video blog is about comparing the results from a business valuation calculator to that of a certified business valuation completed by a certified business appraiser. We thought it’d be fun if we took a valuation of a company we recently completed here at BizWorth and compare the results to the output from a business valuation calculator we found on the internet.
There are lots of business valuation calculators on the internet and we just picked one for this video blog. Over the coming months, we’ll compare more of our certified valuations to the results different calculators found on the internet. The company that we looked at is an automotive repair and maintenance company. The company has an 18-year operating history. They’re at a single location. Their average revenues over the past four years have been $2.9 million with an average net income over the same period of about $330,000. The valuation purpose for this appraisal was a purchase with an SBA backed loan.
I’d like to show you the certified valuation that we conducted here at BizWorth, which is fairly robust. You can see from the table of contents, there’s a lot that’s covered. Everything from an executive summary that attempts to summarize the entire valuation within five pages to the introduction that states the purpose of the valuation and the background of the engagement. Next, we discuss the nature and history of the company, the overview of the economy and industry in which the company operates, and the financial condition and the earnings potential of the subject company. This section includes a robust financial analysis, not only showing the company’s trends, but also benchmarking the subject company against its industry. Then we conduct the valuation of the company. Certified business appraisers must adhere to looking at three different approaches to valuing a business based on the assets, the income (usually the cash flows) and the market approach. Then the report concludes with several appendixes.
For the subject company, with the information that we described a few minutes ago, you can see that BizWorth’s conclusion of value of was $2 million for 100% interest in the business. We then searched the internet and found many business valuation calculators. The one we chose is more robust than a lot of the others we found. It’s a multi-step calculator.
The first step was to determine the cash flows of the business. We entered all the information from sales, cost of goods sold for the business to operating expenditures, officer’s salaries. These are potential add backs. I won’t bore you on this video with what these add backs are, but there is potential to have add backs, which will usually help your valuation because you’re adding back an expense that was taken from up above in the income statement. We then add back depreciation, that’s a non-cash item, interest and other expenses. Once you plug all this into the calculator, you scroll down, and the next step is to determine the multiple of earnings to use. Here they have a few different inputs that they’re asking for.
The next input is for the industry in which the subject company operates and for this one it’s auto repair parts and services, and the earnings trend. We chose just a simple steady revenue sustainable, but in all actuality, I believe this valuation had a mid to long-term growth rate of 3%. Risk factors – we didn’t choose any based on the attributes of this company. The calculator’s first option is “no employees”which means it’s a sole proprietor business, which adds a bit of risk.
Regarding the other options shown, the industry is not in decline. This company had good books and had been in business for longer than one to three years. If any of these items were checked, our assumption is that in the background they were adding risk or increasing the discount rate which would cause the valuation of the company to decrease. Remember, increasing the discount rate decreases the appraisal of the company. For the factors that increase the valuation, we chose SBA Financeable. This company was receiving a certified valuation for an SBA-backed loan. This business had also been in business for longer than 10 years.
If you scroll down further, this calculator is asking for the purpose of the valuation and we thought this was a nice touch until you see that it’s for information only. We’ll discuss why it’s probably for information only, but depending on what you check, it’s not going to change the appraisal. We chose business purchase.
You then click ‘calculate business value’ and now you see the valuation of the business produced by the calculator, which is a little less than $870,000. The site then provides you a summary of what you had entered, and they also provided some valuation ranges which I thought was interesting. The trailing 12 months was $869,000 and then they gave an upside, the higher end of $1 million. The reason why this is interesting is because this calculator produced $869,000 as valuation and a valuation from a certified business professional came back at $2 million.
You can see how far apart the two valuations are – the appraisal from the valuation calculator is less than 50 cents on the dollar. If you are a business owner looking to sell your business, you would automatically be thinking about a much lower price for your business. Maybe you’d be shocked if I had this business for 18 years, this automotive company, and I thought I could only sell it for a million. I’d probably be a bit surprised.
So, I think two key reasons why there are so many calculators on the internet is because many of the sites providing them know the calculators do a great job at attracting business owners, like you, to their site. These calculators also facilitate a means to collecting information on your company.
I’m not sure how useful business calculators truly are for you, but they serve as a tremendous gateway for collecting valuable information from business owners. So be weary if you’re using a business calculator for anything more than just having some giggles about what your company may be worth. In my 20-year history at valuing firms in projects, I have very rarely, if ever, seen a valuation from a business calculator come close to where the proper certified business valuation came out and that’s a bit scary.
At the end of the day, I think business calculators are great conversation starters for valuation firms and brokerages trying to get a business owner to give them information. Also know that many calculators require you to enter your contact information before they’ll give you the estimated value. So, it’s a bit of a hook to collect your information. So be weary of giving information through a calculator and be especially weary of what you do with the information that you receive back.
I hope this video blog was helpful. Please reach out if you have any questions. If you go to our web site, www.BizWorth.com, you can schedule an appointment to meet with me or one of our advisors to talk about your business valuation. Even if you’re not sure it’s the right time for a business valuation, hop on a free consultation and let’s talk through that. We’re always happy to help business owners so feel free to reach out. If you like our content and would like to see more, visit our blog or follow us on Facebook, LinkedIn, and YouTube. Thanks so much.
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