Getting the correct value for your business is an important step to take before selling. However, if the valuation process isn’t done properly, you could end up with an incorrect number, which could be detrimental to finding the right buyer or making the sale.
There are many great free tools to ensure accurate business valuations. Most top tools pull from a database full of businesses and properties for sale. Competitors typically seek to stand out by publishing articles about features, tips, and tricks for making the most of your brand.
Their goal is to help businesses and companies add value to their brand while also connecting potential buyers and sellers. This may make it more difficult to get high-quality information that leaves a lasting impact on your business, which is why using data from a good valuation guide is extremely important.
Common Mistakes Made in Valuing A Business
Here are some mistakes that are commonly made during the valuation process:
1. Having Unrealistic Expectations
When considering the value of a business, the owner will often have an overly optimistic view of what their brand is worth. This can stem from a few things, including a lack of understanding of future cash flow and buyer appetite for the product or service. Or just a lack of knowledge regarding how businesses are valued.
This can also be true for the buyer. They may underestimate the cost of ownership transition or overestimate savings during the merger. Keep these things in mind when the initial valuation is presented. It’s common for owners to question the report as it may not match up with the initial expectations of their brand.
2. Expecting A Fixed Value
Valuation isn’t going to give you an exact number. More typically, you’ll receive a range from a valuation expert. This range will change depending on the size of your business and the industry you’re in. For example, the range may be larger for a small tech business.
It’s also important to recognize that a valuation reflects the company’s stand-alone value. It will not reflect any potential synergies or strategic interests from the buyer.
This initial value range will often differ from the final purchase price because of considerations such as:
- Buyers’ strategic interests or projected synergies
- Owners’ eagerness to sell
- Due diligence
- Available finance options
- The ability for a smooth transition into new ownership
3. Using Flawed Valuation Methods
The relevance of your business valuation will depend on the model used to build the report. There are three main methods: The Income Approach, The Market Approach, and the Asset Approach. These focus on different business factors. The practitioner you choose will select the appropriate model for your brand.
There are a few things to keep in mind no matter the model they choose to complete the valuation such as non-operating assets, off-balance sheet liabilities, risk factors (such as level and solution) and non-financial consequences of the sale.
4. Using Flawed Market Projections
When collecting data to be used in the valuation, conclusions are met using judgment. When those assumptions are incorrect, it means the valuation will be flawed. Your valuation practitioner should utilize market-based forecasts whenever possible to avoid this mistake.
To double-check their work, you should always ask for evidence to back up whatever assumption was made. And don’t be afraid to ask for an explanation of how they reached the conclusion they did.
5. No Consideration For Adjustments
In industries where mergers and buy-outs are common, valuations may typically stick to general ‘Rules of Thumb’ while completing the report. These estimates are shown as multiples, such as “1 times revenue”.
These traditional rules are set in stone and leave little room for adjustments for a unique business entity. There are a ton of factors that should be considered, including: growth, location, cash flow, competition, accumulated debt, and more.
6. Using The Wrong Standard Of Value
When beginning the valuation process, deciding the standard of value sets the tone for measuring how the appraiser will value your business. These options include:
- Fair Market Value: Reports a would-be selling price for an unrelated buyer and seller to agree to
- Investment Value: Based on the business’s expected earnings or the monetary return for one specific investor
- Fair Value: A foggier version of Fair Market Value which may change depending on the valuation’s purpose. It does have a different meaning for financial reporting
This will ultimately affect your bottom line, and the standard chosen should be justifiable.
Value Your Business Properly
With this article, you should have a better understanding of what mistakes to avoid making when you begin the valuation process. However, you should also consider utilizing additional tools to help you reach a final business valuation.
By doing ample research and reading reviews of various tools, you should be able to quickly find a superior business valuation tool easily. These tools require you to enter basic information about your company which is then compared against an industry benchmark to provide you with a personalized and accurate business valuation.