The Basics Of A Business Valuation
Let's begin by looking at profit alone. Say your business took in a profit of $1,000,000 this year. Would your business then be worth $1,000,000? Well, not quite. To see why you need to think about what the business is worth to someone now, not what it will be worth when they tally up the totals at the end of the year.
So, if you were to invest money today at a certain interest rate, how much would you need to invest to end up with $1,000,000 a year from now? Allowing for an interest rate of 10% (this is just an example) you would only have to invest around $900,000. Looking ahead 10 years, that million is suddenly only worth $100,000. Again, this is just a rough example to illustrate the point that the value of a business is not defined by its profit.
This is far from the whole story, however. There is much more to a business valuation than this simple model lets on.
Other Factors That Influence Your Value
Such a simple approach to business valuations has limited uses. Your real business is not just a single number, it is an agent in a landscape full of other agents. It can grow, shrink, outcompete and get outcompeted. As such, your true total value will be calculated based on a number of factors including:
- Market conditions
- The type of business
- Current and projected growth
- Earnings 'quality'
This is why very few business owners have a realistic idea of how much their business is worth. It's a seemingly simple idea that in reality has layers of complexity.
It's worth noting here that business valuations are as much of an art as they are a science. The number you are given at the end of the process was arrived at with great care, but you could go ask a different firm and you'd probably get a slightly different number. For this reason, it's important that the process be fully transparent. You should be able to ask questions, make suggestions, and have an open dialogue with the firm doing your valuation.
Why Business Valuations Are Necessary
You might be wondering why you even need a business valuation. After all, your business is priceless. The truth is that you don't necessarily need to be interested in selling your business in order to benefit from a valuation. Valuations are used for many purposes including:
- Planning for expansion
- Getting a line of credit
- Funding a buy-sell agreement
- Estate planning
With a business valuation in hand, you are better equipped to understand your business and its place in the market. You will be able to plan your growth, raise capital, and protect your assets with all the benefits of a clear-eyed, numbers-based approach.
At Summerlin-Roberts we will perform a business valuation with you, not just for you. We will learn everything we can about your business in order to be as accurate as possible. We strive to be transparent and precise so that you know what we are doing and why we are doing it every step of the way. Please, contact us at Summerlin-Roberts today to learn more about performing a business valuation on your company.