Business valuation is an important aspect of owning a business, particularly for small- and mid-sized business owners. If, at any given time, a business owner does not have a fairly well-defined idea of what his or her business is worth, they are limited in what they can do to increase the value of their business over time. Preparing an exit plan is critical for business owners even when they do not foresee selling for many years to come because when that time comes, every owner wants to get the best possible price for their life’s work.
Ultimately, every business changes hands for any number of reasons – the owner or owners’ retire, profit fails to meet expectation, the owner becomes burned-out and desires a lifestyle change, one partner wants to buy out another, death, lack of heirs – you get the picture. In the meantime, determining the future value of the business begins with the value of the business in the current market to serve as a baseline.
Business valuation is best conducted by a team of professionals including a commercial broker, accountant, and attorney, all experienced at determining the market value of a business and how to improve that value. Business owners should take a hands-on approach to the process of business valuation so they understand how to maximize the future business value.
An initial valuation establishes a baseline from which the value of the business can be adjusted by different business decisions. Fundamentally, the appraisal process considers the current business assets, the value of the business to outside parties (including the brand, customer demand, and profits), and comparisons of a similar businesses in the market. This formula will differ for every business based on its size, location, industry, and more.
Included in the assets are hard assets such as the building (if owned by the business), machinery, technology, and such. In addition, less tangible assets are part of the valuation such as historical and projected earnings, size of the customer base and their buying patterns, patents, trademarks, copy writes, and brand value. Another aspect of the valuation process is identifying the unique advantages and disadvantages of a particular business such as how well the business has developed a niche for itself in the relevant industry, what kind of reputation the business has, and what the business on-line reputation is like.
The valuation methodology is based on the use of specific theoretical underpinnings and related formulas that your specific valuation professional adheres to. One you have arrived at a base line for the value of your business, you can address factors that will increase its value. If you do not plan to sell for some time, you should develop short- and long-term plans to increase the market value. On the other hand, if you are anxious to sell in the near future, your commercial broker can tell you of ways to increase the value over the short-term, before it goes on the market. The speed with which you want to sell will also play a part in the selling price you arrive at.