More Than a Number: What Business Owners Need to Know About a ValuationApril 7, 2017
A business valuation is often mistaken to be inherently subjective. Of course, a business is truly only worth what someone will pay for it. However, a thorough valuation process is much more involved than you might expect, and the final number is relatively empirical. Here’s why you should engage a qualified and experienced valuator for your business:
Every Case is Unique
Two businesses in the same line of work might seem identical at a glance, but each has its own complexities that can increase or decrease its value. Professional valuators examine all of the ingredients that go into a valuation; the three most important being cash flow, net assets and market trends. You’re not valuing the industry curve; you’re valuing your specific business. A generalization would be a disservice to your hard work, and to your financial future.
Standard Formulas = Wide Ranges
There are plenty of websites where you can plug in a few numbers and get an instant valuation. The first issue with this, again, is that a quick calculation doesn’t capture the individual factors that are so crucial to an accurate valuation. The second issue is that you only receive ballpark figures.
Take, for instance, a dental practice. Sole practitioners traditionally sell for between .65 of revenues and 1.2 of revenues. Going strictly by this range would mean that a practice with $1 million in revenues could sell for anywhere between $650k and $1.2 million. It’s nice to have a ballpark figure, but that range is far too broad to sell on.
Most Businesses Need a Valuation for Some Reason or Another
If you start a business knowing you want to sell in three years, you will need a valuation. If you have a business that stays in the family, you will need valuations as it is gifted down the line. If you die owning your business, it will need to be valued for estate purposes. Is every business sold on a valuation? No, there are indeed cases of selling a business on the fly. Should every business be valued before being sold or passed down? Absolutely.
Dabbling Doesn’t Cut it
If you were to hand a high school student a valuation formula, they would likely be able to execute it. The mechanical act of running the numbers isn’t what makes a valuation; it’s the ability of the valuator to understand your industry, your business, and your goals attached to the valuation. Many accountants dabble as valuators, but don’t go into the details. Here at The Curchin Group, we have professional valuators with decades of experience valuing businesses in various industries.
Start Sooner Rather Than Later
It’s always a best practice to keep accurate and organized records, not just for a valuation, but for audits, taxes, etc. But if you think your business might need a valuation at some point in the future, don’t wait until it hits number one on the priority list. Talk to a valuator early on. At Curchin, we’re happy to sit down and talk to business owners about the valuation process. It’s actually better to do so when a valuation isn’t pressing. Click here to learn more about our valuation services, and contact us to schedule a free consultation.