How much is your business worth? If you're selling your company, it's a question you'll want to ask long before it's time to hang out the FOR SALE sign. A business valuation will provide the answer, provided you're an owner who is willing to hear the truth.
Many owners don't want to, and probably can't handle the truth (cue Jack Nicholson). But why? Part of it is because they don't understand the nuts and bolts of valuations. The other reason is fear, denial, short-sightedness, ignorance--the list goes on.
For the owners who can handle the truth, and want it ASAP, I've decided to take you on a deep dive into the topic. For this, I turned to Darren Mize, an accredited senior appraiser with GCF Valuation, Inc.
WHY GET A VALUATION?
It's a question I wish more owners would ask. I've seen too many owners ignore the valuation process and put their business up for sale. The marketplace then proceeds to brutally separate fact from fiction, revealing the true value of their company and causing them to scramble for Plan B.
Why do so many owners get their actual value wrong?
Value is driven from two primary factors: Cash flow (profitability) and risk. Everything else is just a complementary component to one of these two key variables. However, there's a big difference between knowing this information and interpreting it.
"An owner might think their business is booming. Cash flow is high, operations are running smooth, everything seems great," says Mize. "However, they might not realize they have a high amount of associated risk--perhaps they rely on one or two customers for most of their business. Suddenly, their value is much lower than expected." A valuation can uncover these details, revealing chinks in your business' armor that you didn't know existed. If you plan to sell your business, understanding and correcting your shortcomings is crucial for a successful deal.
Before we break down the method appraisers use to create an accurate business valuation, let's examine two types of appraisals that are most useful for owners looking to sell their business.
CHOOSING THE RIGHT VALUATION FOR YOUR NEEDS
The first thing you should do when looking for an appraiser is ensure they are accredited. That means they're continuing their education, they're experienced, and they belong to a recognized appraisal associate (there are four of these associations).
Beyond that, both of the following business valuations can accurately determine your company's value...