Determining the valuation of a business is both a science and an art. On one hand, there are hard facts: income, expenses, profit, etc. On the other hand, one must consider market factors: industry trends, saturation, economic conditions, etc. Which numbers are most important? How should these variables be weighed? What will a buyer focus on most? A business valuation equip an owner with these answers…and many others.
But the one question that trumps those listed above is: Should I value my business myself or hire business valuation services to do it? With business valuations costing hundreds to thousands of dollars, it’s easy to understand why an owner would consider valuing their business themselves.
We at Business Sale Advocate want to be clear on our opinion–a business broker or business valuation service should ALWAYS be hired to conduct a legitimate, defensible business valuation. Below are our top reasons why:
It’s complicated. A thorough business valuation computes six to ten different valuation methodologies and then weighs each result to determine a final valuation number. Specific valuation resources such as the RMA, Pratt’s Stats and BIZCOMPS are used to compare a company’s information with similar businesses. Mounds of financial documents need to be sifted through to analyze both the historical and projected performance of the company. If a business owner makes the time to 1) learn how to value a business and, 2) prepare a valuation for their own company, who’s going to do their job?
With a business for sale the owner and their advisor must be prepared to defend the asking price. Savvy buyers will closely examine the business valuation and strategically ask questions that, when answered poorly, will support an argument for reducing the asking price. When preparing business valuations, a credible valuation service will anticipate buyer challenges on price and incorporate value defenses directly into the document. This gives owners a sense of confidence and support when negotiating with potential buyers.
A business valuation independently validate and benchmark the true worth of a business. Business owners over-value the worth of their business a majority of the time. “I was contacted recently,” begins Brian Mazar, Managing Director of American Fortune Mergers and Acquisitions, “by a woman who was several months into the sale of her business. She needed a valuation and had valued her own business at $1.5 million dollars. Once I reviewed all the details of her tax returns and did the analysis, her business was only worth $1.2 million The news was so hard for her to hear.” Owners put so much of themselves into their businesses that it’s only natural for them to think “their baby” is worth more than it actually is. Part of this is due to an owner’s emotional attachment and part is due to their perception of cash flow. “Just because you earn several hundred thousand dollars a year does not mean you can simply multiply that out and put a large price tag on your business. Unfortunately, though, owners do it all the time,” Mazar shares.