Avoiding Common Pitfalls in a Business Valuation
If you own a business, at some point you’ll need to know what it’s worth: whether for estate planning, a significant life change, or potential sale. Without expert guidance on how a business is valued accurately, it can lead to pitfalls that might not only skew your expectations but could also be financially detrimental.
The Risks of Relying Solely on Your CPA
While your accountant is invaluable when it comes to handling payroll, financial reporting, and taxes, business valuations are a specialized field. Different businesses need different valuation methods that are often overlooked by non-specialists. A valuation expert brings a deep understanding of the process, market dynamics, and access to comprehensive data on comparable sales, ensuring accurate valuations.
Understanding Misleading Comparisons in Valuation
We’ve all seen the articles about an unexpected business selling for millions of dollars. These articles often highlight exceptional cases (that’s why they make the news) so you can’t expect every business in that industry will sell for a similar amount. These transactions are what we call outliers and should not set expectations for the value of your business. A valuation expert can spot the difference between a good comparable and a bad one.
Why Anecdotal Evidence Can Lead to Incorrect Valuations
There are many factors that impact the value of a business: financial health, market position, client concentration, and operational structure, to name a few. Just because someone knows someone who sold a business like yours doesn’t mean that business’s value will be the same as yours. You can’t base your business’s worth on hearsay or the sale prices of seemingly similar businesses. That just leads to erroneous conclusions and a potentially inflated value.
The Importance of Objectivity in Valuing Your Business
No one knows more than a business owner (and their family) what it takes to own and run a business. You’ve poured everything you have into growing it and the emotional attachment is real. But that attachment and rose-colored glasses can lead to overvaluing the business and unrealistic expectations. Using an unbiased, third-party person to value your business removes that emotional component.
Choosing the Right Approach to an Accurate Business Valuation
Whether your purpose for valuing is to sell, financial planning, partner buyout, or litigation (such as a divorce), using a certified valuation professional is essential. Undervaluation can result in financial loss, whereas an overvaluation leads to a business that doesn’t sell. By working with someone who knows how a business is truly valued, such as a business broker, you’ll avoid costly mistakes, understand what your business is truly worth, and sell (if that’s your goal) faster.
Visit BizBuySell’s Business Broker Directory to find an intermediary who can guide you through the valuation process when selling your business.