Simply put, if you are able to understand the factors that determine the value of your business, you will increase your firm’s short and long-term profitability. After all, what business owner out there wouldn’t want this?
What Exactly is Business Valuation?
Well, let’s say you own stock in a particular company. Simply multiple that company’s closing price by the number of shares you own in the company. That’s it, that’s all there is to it. but what if your firm is private? Often, times people like to think that valuing a private business is a hairy procedure, and many don’t know what it entails.
Let’s break things down, in order to simplify the valuation process, for you private business owners…
When Should You Value Your Business?
Although the business sales and lending procedures generally require that valuations be completed, if these events are the first time you have had a valuation completed, then you probably have not dealt with critical business and estate planning issues yet.
If your business is to have a life past you as the owner, then effective planning for ownership transition requires a regular valuation of the business.
How Can You Gauge the Value of Your Business Today?
What your business is worth currently depends on three factors:
- how much cash is coming in
- expected cash in the future
- the required return by buyers on their investment in your business
Can You Compare the Value of Your Business To Your Competitors?
If your cash flow is relatively the same, then maybe, but otherwise, no. In short, the value of your business, like the value of any major corporate stock, is likely different today than six months ago because economic conditions have changed. Try not to compare your business to what your competitors sold at.
What if Your Business Loses Money?
A vast majority of private businesses seem to lose money. Still, everything isn’t what it seems. Unlike public companies, the distinction between ownership and management isn’t really a clear one. So, owners have some discretion over how they categorize cash flow generated by the business.
Quantifying the size of these expenses is often a critical factor of the firm’s value. Because of this, owners should keep a watchful eye on what these expenses may be so that, when they are ready to sell the business, they can document these facts to the buyer. In doing so, the seller increases the buyer’s confidence that the business does significantly generate the cash the seller claims – increasing the buyer’s willingness to pay the price that is asked to purchase the business.
There are many important things you should know about value of your business, way before you decided to sell it. With these tips, you should be on the right track to planning your business’ financial future!