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Business Valuation Services | Reasons Why Business Owners Need a Business Valuation
Determining the value of a business is both a science and an art. Business valuation services cover many of the challenges that owners experience when selling their business. For example, owners often find it easy to pull out the hard facts of their business, such as expenses and income but struggle with customer saturation and industry trends.
The valuation of a business usually does not match what the business owner believes the company is worth. Sometimes that works in their favor because they did not consider intellectual property or prime economic conditions. However, many times, a business owner dramatically overestimates the value of the company and the likelihood of selling quickly.
How do professionals use all the elements necessary to calculate a business valuation? Professionals such as an M&A advisor or business valuation services expert will pull together the internal and external factors into different reports depending on the owner’s needs.
We at American Fortune Business Valuation Services want to establish our stance: a business M&A adviser or business valuation services expert should ALWAYS be the ones to perform a legitimate and defensible business valuation.
1. Valuing and Selling a Business is Complicated
When you’re handling everything from profits to economic conditions, how do you determine which numbers are most important? How should these variables be weighed? How can anyone know what the buyer will focus on the most? Then there are even more serious questions such as, “Should I try to use a low-priced internet business valuation calculator, or hire a professional business valuation service firm?”
A business valuation performed by a qualified business valuations services firm will walk the owner through these questions with a proven track record to support their answers. Get answers to your questions as well as a fair and defensible valuation, which is something you can’t achieve from an online valuation calculator or low-priced service.
We understand, business valuations often cost several thousands of dollars. The expense of a proper business valuation stems from the complicated matter at hand. However, different valuation reports are available and different approaches to valuations to ensure that a business owner gets the information they need at that moment.
To put it simply, it’s complicated. A thorough business valuation can use anywhere between six and ten different valuation methods. Then the professional will carefully weigh each result to determine a final valuation number.
Professionals working with business valuation services will rely on specific resources such as the RMA, Pratt’s Stats, and BIZCOMPS to compare a company’s information against similar businesses.
Ultimately, it’s easy for one valuation to result in mountains of paperwork and financial documents. The majority of business owners don’t have the time to learn how to value a business or prepare a defensible valuation report. If they do take the time to learn these new skills, who will run the company? Additionally, business owners don’t usually work within the market and may not have a grasp on the current market, which is vital for proper valuation.
Another key reason that owners should not conduct their company’s valuation is that there is a clear bias. An owner has invested time, money, and effort into their business, and that can sway their opinion on their company’s value.
The ability to value a business takes a significant amount of education and experience. Experts in business valuation services typically have ten or more years of valuation experience and consistent and up-to-date knowledge of the market and economic conditions.
2. The Asking Price is Always Negotiable
When a business is available for sale, the owner and their adviser must prepare to defend the asking price. Business sales operate with the idea that the asking price is just a starting point. In response, savvy buyers will pull apart a business valuation by strategically asking questions that would support their reason for reducing the asking price.
Using business valuation services should provide the business owner clear insight into anticipated challenges during the selling process, specifically price negotiations. The adviser should always defend the asking price by cultivating a strong defense within the valuation report. Even with a strong and defensible valuation report, the adviser may need to address issues relating to price directly.
A valuation expert must provide information covering current market conditions, and connect that data to investor rates of return, size of the business, and risks specific to the industry. Business valuation services don’t just provide a flat number you should expect from the sale. Instead, it should provide a complete evaluation of the market, your business, and what the investor hopes to achieve as well.
For example, a smaller business will pose a larger risk, whereas larger businesses present a lower risk. An investor will always want to minimize risk when possible. This may prompt a potential buyer to negotiate a sale price based only on the business’s size.
3. Anticipate Challenges
The goal of working with a business valuation services expert is to provide the owner with a sense of confidence and support when negotiating with potential buyers. They should do this by accurately assessing the price and then incorporate the value into a defensible document that can withstand rough negotiations. In addition to the defensible document, the professional should also conduct a risk assessment for elements such as customer concentration. If a company’s revenue comes from only a handful of customers, then there’s the chance that they could face serious challenges in selling the business.
For example, if a company’s revenue is concentrated in one to five customers, or if any single customer represents more than 25% of the revenue, they may have trouble finding buyers. The anticipated challenge here is that these customers may leave when the business changes hands. Then the new owner would have lost a fair amount of the expected revenue right away.
Other risks and commonly expected challenges include:
- The loyalty of the management team
- Family members making up the top management team
- Product concentration focusing on only 1 to 3 product lines.
- Ownership or use of intellectual property
- Crowded market
Because of these common challenges, an advisor must look far down the road to plan properly. An anticipated challenge may result in reasonable delays or obstacles such as not drawing in many interested buyers. An advisor can help an owner survive a crowded market through business valuation services, identify decision-driving elements of the valuation, and present the company as a desirable investment.
4. Establish Expectations
The valuation process looks closely at how the business operates and why it’s successful or ready for sale. The valuation report must establish the valuation of the company and what aspects contribute to your expectations with a sale price and the type of buyer the owner desires. Many business owners work with the assumption that they’ll need to take whatever prospective buyer comes along.
During the valuation, the owner should set some base expectations in what they want to accomplish through their company’s sale. Are they looking for a buyer who can help it grow, or do they want someone to turn it around? These are the questions that an adviser would consider as part of the business valuation services they provide.
Additionally, it sets the stage to discuss the expectations in terms of the sale price. As mentioned earlier, the price is negotiable but establishing an asking price is one of the core functions of a professional valuation. The primary reason for bringing in a professional is that business owners tend to over-value their business’s worth substantially and often place their asking price too high.
“I was contacted recently,” begins Brian Mazar, the Managing Director of American Fortune Mergers and Acquisitions, “by a woman who was several months into the sale of her business. This owner needed a valuation. She valued her own business at $2.0 million. 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 pour themselves into their business, and it’s only natural that they think “their baby” is worth more than its actual value. Part of this is due to the owner’s personal or emotional attachment. However, another portion of this perception is the owner’s vantage point on cash flow because of how owners handle the financial side of the business.
“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.” Brian Mazar shares.
What You Need to Know About Business Valuation Services
Business valuation services should always fall to the professionals. Business owners must work with a business M&A adviser who has specific business valuation expertise or to work with a business valuation expert.
With professional business valuation services, a business owner can get ahead of factors that will unquestionably affect their business’s sale. These professionals handle difficult obstacles, such as changing economic conditions and market trends, daily.
When searching for a business valuation services firm, you direct your attention to firms with a long track record of successful sales and advocating for the seller during negotiations. You can find this level of support at American Fortune Business Valuation Services.
A business valuation by a accredited Business Valuation Services Firm independently validate and benchmark the true worth of a business.