If you’re like most business owners, when someone asks “what is your business worth?” you may get a little uncomfortable. Not because you don’t run a successful business. It’s more the fear of not knowing how to value your business and the worry about how much time and money it is going to cost you.
The valuation exercise can often seem like a mysterious, complex process that only an MBA can figure out. To be fair, you can make it incredibly complex but that doesn’t necessarily make it more accurate or valuable to the user (which, for this discussion, is the business owner). We’re not going to get into the details behind the methodologies of calculating a value for a business (discounted cash flow, market approach and asset approach). Instead, we’d like to address the importance of knowing what your business is worth well before you decide to sell it.
Business owners should always have an understanding of what their business is worth
You may not think you’re going to exit your business anytime soon, but what if something unexpected happens? What if you receive an unsolicited offer for your business? What if the worst happens and you or someone in your family falls ill? Your business is likely your largest asset and you’re planning on that asset to fund your family’s needs after you exit.
Always having an understanding of the value of your business can help you make those critical business decisions faster and with more confidence.
Don’t worry about being “correct”
As we said earlier, valuing a business doesn’t have to be a complicated mathematical exercise. In fact, the value you calculate will never be the actual value you sell it for, so don’t worry about being “correct.” Try not to get caught up in the mechanics of the exercise or be intimidated by terms and calculation methodologies that you hear in the market. Instead, view the valuation process as a way to identify potential drivers and detractors of value that you can address before you decide to sell your business.
Look at your business through the “eyes of the buyer”
The most important and possibly most difficult aspect of valuing your business is viewing it through the “eyes of the buyer” (even if you’re not ready to sell). You know your business better than anyone and probably have a good idea of what the value is – to you. Unfortunately, a potential buyer won’t know your business in detail and could have a different view of value.
Whether you’re ready to sell your business or not, the real benefit in going through a business valuation exercise on a regular basis is to identify potential value drivers and value detractors of your business.
- For example, your sales have been increasing over the past three years, which on the surface is a value driver. What if 50% of your sales generate from only three customers? This could actually be a value detractor. While sales growth appears to be a value driver at first glance, the risk of customer concentration may be viewed as a value detractor by a potential buyer.
Knowing what your business is worth is an important aspect of running your business effectively. On a regular basis, step back and look at your business through the “eyes of the buyer” to identify areas that could improve your business today and make it more valuable in the future.
April 30, 2014
By Tensie Homan