When you’re planning to sell a business or looking at businesses for sale, a detailed business valuation will be crucial. Yet many business sellers and buyers underestimate the importance of valuations, or they misunderstand the valuation process.
So let’s quickly set the record straight.
If you’re selling a business, a valuation has two important functions.
First, it gives you a sense of how much you’ll get for your business. Without a proper valuation, many business owners have an inaccurate sense of their business’s worth. In these cases, it’s better that owners find this out early — before listing their businesses for sale.
Second, it helps increase the chances of selling your business quickly and at maximum value. Business buyers are much less likely to negotiate pricing than you might expect. If they see a business listed for more than it’s worth, they’ll simply move onto the next listing.
So if your business is overvalued, your listing could stagnate. That extends the time it takes to sell your business. And it can ultimately lower the market value of your business.
If you’re buying a business, the main benefit of valuating businesses for sale should be obvious. When you buy a business, you want to make sure that you’re paying fair value.
But with a proper valuation, you’ll also get a better sense of what returns you can expect from your investment. A professional business valuation will include detailed cash flow projections, giving you a detailed look at how much value the business will generate over the next several years.
Now that we’ve covered the importance of valuating businesses for sale, let’s look at a few different valuation strategies.
How to Valuate Businesses for Sale
If you’re selling or buying a business, there are a few different ways that you can perform a valuation.
Basic Business Valuation Strategies
The simplest strategies used to valuate businesses for sale tend to also be the most common. Examples include:
- Appraising a business’s assets and liabilities to calculate value
- Applying a standard multiplier to average annual revenues
- Applying a standard multiplier to average annual profits
Because of their simplicity, these strategies are popular with independent business sellers and buyers. They’re also common among inexperienced and amateur business brokers.
However, these strategies fail to account for many of the things that actually make a business valuable, particularly after a transfer of ownership. Additionally, they aren’t always an accurate reflection of the market value of businesses for sale.
Professional Business Valuation Services
Given the failings of basic valuation strategies, we strongly recommend hiring a professional business valuation service if you’re selling or buying a business. This should be someone who’s qualified to valuate businesses for sale and who is certified by organizations like the Appraisal Foundation and the Institute of Business Appraisers.
A professional business valuation will consider things like net assets and annual cashflow. But it will also cover a number of additional factors — factors that are much harder to quantify and measure without a valuation specialist.
These include things like the management structure of the business, and whether it’s suitable for operations under new ownership. Many small business owners develop their businesses in a way where, without the owner, the business can no longer operate.
A qualified valuator will know how this impacts the value of a business for a new owner. But this kind of concern will slip by if you apply a basic valuation strategy. And this is only one of the many ways that a valuation specialist can valuate businesses for sale more accurately!
This covers the investment value of a business. But experienced valuators also know how to assess the market value of businesses for sale.
In some cases, market value may be a different figure from the investment value of a business. Even so, this number will be critical whether you’re selling or buying a business. If you’re selling, you’ll know how much you can reasonably expect to earn from the sale of your business. If you’re buying, it will tell you whether you’re paying a fair rate, based on market indicators.
Selling a business? Looking for businesses for sale? Call Murphy Business today at (888) 561-3243 to connect with a local business broker!