{"id":3840,"date":"2020-01-01T13:22:00","date_gmt":"2020-01-01T13:22:00","guid":{"rendered":"https:\/\/fusionwm.com\/?p=3840"},"modified":"2022-10-12T13:26:53","modified_gmt":"2022-10-12T13:26:53","slug":"do-you-know-really-know-what-your-business-is-worth","status":"publish","type":"post","link":"https:\/\/fusionwm.com\/do-you-know-really-know-what-your-business-is-worth\/","title":{"rendered":"Do You Know\u2014Really Know\u2014What Your Business Is Worth?"},"content":{"rendered":"\n
\"Do<\/figure>\n\n\n\n
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If you think you know the true financial worth of your company, a formal business valuation might change your mind.<\/p>\n\n\n\n

If you\u2019re planning to sell your business, or even if you\u2019re just thinking about possibly doing so down the road, you\u2019re going to want to have a formal business valuation conducted. Formal valuations are often very useful in helping all parties by providing, at the very least, a solid starting point for negotiations.<\/p>\n\n\n\n

But you might want to value your business even if you have no intention of selling. For example, a formal valuation can be an important step to take if you are looking for credit, determining the ownership percentages of partners or going through a divorce.<\/p>\n\n\n\n

As you\u2019ll see, you might be surprised by what you discover when you get your company formally valued.<\/p>\n\n\n\n

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Perception versus reality<\/h1>\n\n\n\n

According to a survey by AES Nation of 208 successful business owners looking to sell their business within the next five years, about 70 percent have had a formal valuation conducted within the previous three years (see Exhibit 2). As business owners get closer to deciding to sell their company, we tend to find that they are more likely to have it valued. That makes sense, given that a formal business valuation is often required when selling a business.<\/p>\n\n\n\n

When a formal valuation is done, the results are often unexpected. Consider that nearly 85 percent of the entrepreneurs surveyed by AES Nation said the valuation came in lower than they anticipated (see Exhibit 3). These entrepreneurs clearly had overestimated their companies\u2019 worth\u2014not terribly surprising, given how hard they likely worked to build their businesses and how emotionally invested they are in them.<\/p>\n\n\n

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Still, this finding should give you pause as an entrepreneur. If your perception of your company\u2019s value is too high, you might end up walking away from some solid offers. In fact, if your determination of the value of your company is meaningfully greater than the value determined through a formal valuation, there might not be many buyers taking interest in your business at all.<\/p>\n\n\n\n

Note that 15 percent of the entrepreneurs surveyed by AES Nation were pleasantly surprised by the formal valuation because it came in higher than they expected. There are potential problems when you undervalue your company, too. For example, you might take a low offer that is clearly not in your best financial interests.<\/p>\n\n\n\n

The most interesting finding, to us, was that not one of the entrepreneurs said the valuation was \u201cjust right.\u201d This strongly suggests that a formal valuation is an important step in reconciling perception with reality.<\/p>\n\n\n\n

Important:<\/strong> Formal valuations are not necessarily the price your company will ultimately sell for. They are generally the starting point for negotiations and helpful in justifying a price.<\/p>\n\n\n\n

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Examples of business valuation methods<\/h1>\n\n\n\n

So where to begin? There are a number of business valuation methods that entrepreneurs who are thinking of selling their company should be aware of.<\/p>\n\n\n\n

The following is a brief overview of six commonly used business valuation methods.<\/p>\n\n\n\n

  1. Market value company valuation.<\/strong> This is a comparison of your business with the sale price of similar businesses. Comparative data is required. In some situations, such as those involving the sale of relatively small companies, such information is not available or is not very informative. <\/li><\/ol>\n\n\n\n

    This method can be a good starting point in helping determine what your company is worth, and it helps start the discussions about selling your company. However, it can be imprecise and is often quite subjective. Therefore, your and your team\u2019s ability to negotiate becomes especially important when this approach is used.<\/p>\n\n\n\n

    1. Asset-based company valuation.<\/strong> This is a balance sheet approach that calculates the company\u2019s book value\u2014its total assets minus the total liabilities of the company.<\/li><\/ol>\n\n\n\n
      1. ROI-based company valuation.<\/strong> A buyer considering his or her return on investment (ROI) is calculating the potential payout from acquiring your company. Issues that buyers are likely to consider include:<\/li><\/ol>\n\n\n\n