Know the value of your business

Desy Papper

Question: I’m curious to learn more about business valuations. Should business owners seek out business valuations only when they are planning on selling, or should this be done regularly for informational purposes? A: Although it may be obvious that your business is successful and has value, many business owners aren’t […]

Question: I’m curious to learn more about business valuations. Should business owners seek out business valuations only when they are planning on selling, or should this be done regularly for informational purposes?

A: Although it may be obvious that your business is successful and has value, many business owners aren’t exactly sure what their businesses are worth. The products or services you provide are meaningful to your clients. Yet, if someone asked you, “How much is your business worth?,” could you confidently provide a quantitative answer?

In our experience, we have seen many business owners overestimate the value of their businesses, based on rules of thumb, comparing themselves with other similar businesses that have recently sold, or by a simple “gut feeling.”  Sometimes, albeit less commonly, owners undervalue their businesses for the same reasons. One thing is clear: Failing to know what your business is worth right now can have negative consequences for your business and personal goals. 

Some considerations:

  • Growth planning. A business’ value can be indicative of how well (or whether) it’s growing. While factors such as gross sales and cash flow play an important role in determining business value, they aren’t the only factors. For example, if the cash flow results from two or three big clients, potential buyers most likely will reduce the value the business due to the risk of large losses if one of those clients leaves following a sale. Likewise, if you, as the owner, are the primary reason for strong cash flows, a potential buyer may reduce their assessment of the business’ value to reflect the cost and risk associated with your eventual absence. Even if you never intend to sell your business, its value is primarily based on what qualified buyers would be willing to pay for it.
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