How Much Is My Company Worth? FAQs on Business Valuations

How Much Is My Company Worth? FAQs on Business Valuations

by Jason Buhlinger
February 08, 2023

For entrepreneurs, your business is your life’s work. But when it’s time to sell, owners often jump at offers that seem like a good deal without having done any planning or preparing the company for sale. This can result in getting far less than what the business is truly worth.

But how do you determine your company’s true market value? And how do you get buyers to pay it? It all starts with understanding the valuation process and the role that it plays in your exit strategy. The following FAQs can help you prepare for this process and ensure that you don’t leave any money on the table.

Why Is a Business Valuation Important?

Businesses are like fingerprints — no two are the same. A proper business valuation helps you understand what your business is worth by identifying what sets you apart and how that uniqueness translates into future cash flow and economic benefit for potential buyers. The business valuation facilitates the sales process so you can:

  • Set the price of your company
  • Ensure you get adequate value for the business you’ve created
  • Take steps to enhance the value of your business
  • Make your company more appealing to investors

What Does a Business Valuation Entail?

The valuation process is a comprehensive analysis that helps determine how much your business is worth. It’s a series of mathematical calculations that also take intangible factors into account to understand what makes a business unique and how that translates into future cash flow for potential buyers.

What Factors Determine the Value of Your Business?

There are three standards of value that professional appraisers use to determine what a business is worth:

  1. Fair market value (FMV): This refers to the value of the business to a theoretical buyer. It assumes that a buyer and a seller negotiate in an unrestricted market where both parties have access to all the facts.
  2. Investment value: This is the value of your business as perceived by a specific investor or competitor. Generally, this price is higher than what others would be willing to pay because the assets have greater value to this particular buyer due to transaction-related synergies.
  3. Fair value (FV): This value is defined by accounting guidelines or court precedents, depending on the nature of your sale. It can be an exit price that you would receive if you were to sell your business on the open market, assuming the highest and best value of the asset, or, depending on the court jurisdiction, something more specific.

Is There More Than One Valuation Method?

There are three valuation methods used to determine the price of a company. Valuation experts choose the most suitable method for the type of business and its circumstances:

Asset approach

This method takes the current market value of your assets and subtracts the current market value of your liabilities to estimate the net asset value of your business.

Income approach

This strategy focuses on your company’s ability to produce future earnings. Based on heavy analytical mathematics and forecasting, it looks at future expected value to determine how much your business is worth today.

Market approach

This methodology looks at what other businesses in your industry have sold for to calculate value as a multiple of your revenue or earnings before interest, taxes, depreciation and amortization (EBITDA).

How Can You Maximize the Value of Your Business?

Planning ahead is key to preparing your business for sale and appreciating its value. For this reason, experts recommend that you work with a business appraiser to get periodic valuations.

When considering a sale, it’s also important to have an evaluation done on the front end. This can help you identify the issues that need work and gives you an opportunity to fix them before taking your business to market. This process may involve:

  • Preparing your financial statements for the sale process
  • Putting in place the right staff with a track record of proven success
  • Implementing processes that help your business run smoothly
  • Integrating technology to future-proof your operations
  • Considering the tax consequences of a transaction
  • Establishing a timeline for a transition

When Should You Do Periodic Valuations?

Going through the valuation process gives you perspective on the fair market value of your business and how it can increase over time. With every valuation, you can learn about best practices to help boost your company’s market price and plan for your future exit.

For most businesses, this means undergoing a yearly valuation. Just like you revisit and keep your business plan up to date, an annual valuation allows you to assess the current state of your business as you prepare for the following year.

Because appraisers understand the implications of the valuation process and selling your business, they can offer insights that bridge the gap between your current and desired value. By bringing them on board on a regular basis and addressing their recommendations, you can take the right steps to ensure a more favorable transaction when it’s time to sell.

What Are Some Red Flags to Look Out for?

Business owners should beware of the following factors, as they can lower the value of your business:

  • Poor financial statements
  • Low profitability compared to competitors
  • Revenue concentrations with customers who are not under contract
  • Lack of supplier diversity
  • Employees who are not locked into any type of non-compete or non-solicitation agreements
  • Operations that are too reliant on an owner or a few key employees

The Bottom Line

You don’t want to get shortchanged by making a knee-jerk decision to take the first offer that comes your way. With so many tangible and intangible aspects that contribute to your company’s value, it’s important to plan ahead to increase your chances of a successful sale.

A formal valuation will provide you clear evidence for the value of the business you worked so hard to build and will help you prepare an exit strategy that makes sense for the future of your business and for you.

For more insight on the benefits of a valuation for your specific situation, contact our business valuation experts today. Our advisors understand the nuances of selling your business and are here to help with every step of your transaction.

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