Why Business Valuations Matter

Why Business Valuations Matter

One of the most important things a small business owner can do is to understand the worth of their business. However, most business owners don’t know the true worth of their business, or they greatly over- (or under-) estimate the business’ value. Also, many owners don’t think that finding out how much their business is worth is important.

For business owners, knowing the value of the business they have been working to build for so many years is a critical component of determining their future strategies for growth, succession, and exit planning.

Here are the key reasons to have a valuation performed:

1.       Gain insights on the “real world” financial condition of the business – The valuation will provide additional information, along with your balance sheet and P&L, that will help you understand the total underlying value.

2.       Help make decisions for financing, sale or even merger opportunities – By knowing the value of the business, an owner will have a more realistic view of what the business is worth, including for getting additional bank financing to help grow.

3.       Help a business owner to make the right strategic decisions – This will help add value to the business, which will in turn help a seller make more money upon the sale of the business.

4.       Understand the business’ worth in comparison to other businesses – This is specific to their industry or niche market. Although there may be general “rules of thumb” that are used to value a business, each industry will have additional idiosyncrasies to account for the value of the business.

All small business owners should be thinking about their exit strategies way before they need to sell or pass on the business. For example, we just recently sold a business that had been a father-son partnership, and when the father was ready to retire, the son didn’t want to take over the business! We were able to help them find a buyer and a fair price for the business, so it was a win-win for everyone—including the son, who wanted to stay on as an employee! In this case, a business valuation was critical because it provided the owner the information he needed to determine whether he could sell and provided him with what he needed to do to effectively sell the business.

There are also several different types of valuations:
1.       An appraisal
2.       A broker’s opinion of value

A full appraisal will cost significantly more than other valuations. This is because the appraiser performing the appraisal should be properly certified, will perform significant background research on similar businesses that have been marketed or sold, and will provide information that can be used in a court of law for disputes, estate matters and other family matters.

A broker’s opinion of value (BOV) will also have include some of the above information, but a broker will have access to information on similar businesses they have sold (this is not public information), and will rely on a review of this information to provide a value for your business in terms of what a reasonable buyer will pay for the business. Although a BOV is not valid for legal matters, it is important to remember that it will provide the information a business owner will need to better understand the price for which the business will sell.

At Transworld, we have the tools and experience to perform a thorough BOV that will provide a small business owner with the insights they need to make an educated decision on what their business is worth, and how to price it for sale, or what could be done to add value to the business prior to listing it for sale.

If you would like to learn more, please email us at utahcounty@tworld.com to schedule your no-obligation consultation.