How To Valuate Your Business
There are many reasons why business owner might be interested in determining value of a business.
- Evaluate possibility of selling a business
- Prepare business for next round of financing
- Preparing to acquire another company
- Preparing company for going public
When you're referring to business value, you have to be specific about type of value in question. Business has its "book value", "fair market value" and "liquidation value". Any accountant can easily calculate book and liquidation value. Determining fair market value of a company is much more complex process and can be accomplished only by professional skilled in business valuation. Below we refer to fair market value when discussing company or business value.
So, what are the components considered to determine business value?
First, financial history. BBS reviews financial documentation for the last 3-5 years, when available. It indicates trends in revenue, profitability and can be compared with industry average indicators.
Second, business plan, written or verbal. How close the business plan reflects actual performance? How aggressive and realistic it is? Are product and services still as desirable as planned?
Third, organizational structure. What would happen if current owner is no longer with the company? Will it immediately crash, slowly loose its business, or continue running without major problems? This is a very important aspect for majority of business buyers and they would pay premium for it.
Fourth, target buyer. Value of a business greatly depends of a buyer. One buyer can see only collection of discounted equipment (liquidation value), while the other may see strategic synergy with their existing business and recognizes add-on value in created goodwill.
Fifth, vendor and customer network. How diverse vendor and customer networks? What happens if one of the major players leaves? Does company have a uniquely targeted distribution network, or hard to repeat distribution concept? Answers to all these questions significantly affect company's value.
Owner's personality, drive to succeed, correct strategic goals and tactical moves, purpose of evaluation... The list can go on and on...
Business Brokerage Solutions, LLC. offers professional business valuation services. We start with evaluating financial documentation, then interviewing the owner and, possibly, key employees. Then we study business plan, industry statistics and state of company's marketing and distribution. We end up producing a comprehensive report containing our business valuation and recommendations for improving the value, if any.
Our business valuation services are retainer-based. Business valuation may take anywhere between 3 days and 3 weeks depending on company size.