10 Sep Business Valuation 101
Maybe you’ve decided to sell your business, or you’re just wondering what it’s worth. Every situation is different, but this blog will helpfully help give you some guidance.
There are many factors in figuring a business’ value.
- Type of Company
- Quality of Earnings
- Growth Rate
- Market Conditions
Some of these factors are tough to assign a number to, which is why business valuation can be rather tricky.
For example, recently Software businesses have been in high demand, which has driven prices for those companies up higher than the demand for a less desirable company.
Present Value can be complicated, as you consider future profits when assigning a value. You have to account for the fact that it’s going to take 10 years to recoup that money, so you would assign a p/e value to the transaction and figure based on that.
Another aspect you have to take into consideration is growth. Has the company shown steady growth? Or are they in danger of closing? This will also affect your valuation significantly.
Predictability is an aspect of valuation that is difficult to quantify. Even if a company has been steadily growing, there is nothing saying that growth will continue. For potential buyers, this could be cause for concern, and thus reduce the valuation.
If one customer makes up the majority of your income, that will also reduce valuation. That one customer can effect the predictability dramatically, and the fear of that customer going elsewhere is what causes the value to drop.
A lot of times, business owners believe their company is worth more than it is, because they have spent so much time/energy/effort building the company. Unfortunately, emotional attachment is not something potential buyers are willing to pay for.
Comparable business transactions will also be looked at when considering a value for your business. Much like when purchasing/selling a home, the recent transactions locally can influence the price dramatically.
Having great records of cash flow, profit, etc. will be something that will help you if you do want to sell your business. Buyers want to see a great track record so they know what they’re buying into.
As you can see, there are many moving pieces to putting a value on your business, no matter the size. Before making any decisions, we recommend that you receive a formal valuation in order to protect yourself and your business!