02 Aug

Your Small Business Needs a Valuation

 

 

 

Do you know how much your small business is worth?  Do you have a clear and provable method of measuring the different processes you use to manage and lead your business?  Do you know for a fact where you need to put your money and efforts to grow your business; or are you deciding on instinct or gut?  One of the best ways to answer those questions, and then actually do something with the information to improve your small business, is to obtain a Business Valuation.

A Business Valuation is a key and critical tool for any business owner and is crucial to long term planning.  A Business Valuation is simply a way to measure the business’ value on a given day. It demonstrates the business’ ability to produce economic benefits for its owners, as well as demonstrates the risk of owning the business.  It should give the owner a clear picture of the present state of their business and what they need to focus on to improve the business’ long-term outlook.

Business Valuations are not just for those considering selling their business.  A good Business Valuation has multiple uses.  Besides being used to determine an asking price should a business owner be considering a sale of their business they can be used to develop a strong business improvement plan based upon measurements unique to the business, construct an offer to buy another business, get a bank loan, determine what it would cost a new partner to “buy-into” their existing business, settle a disagreement with a partner, or defend their business value in a legal dispute.

What should the Valuation specifically tell you?

Current Company Value

Evaluation of Current Financial Management Practices

Debt Management Status

Goodwill (Economic Value of Their Customers to Their Business)

Estimated Loan Eligibility

Specific Areas for Improvement That Impact Company Value

Current Rate of Business Erosion or Growth

Stock Price (Even if Their Business Does Not Issue Stock)

There are different kinds of Valuations.  Some of them are:

Asset-Based Valuation

This type of business valuation is appropriate for retail and manufacturing companies. This approach takes the fair market value of fixed assets and add the value of any improvements, plus the wholesale value of inventory, to arrive at a value approximation.

Income Valuation

The income approach to valuation bases value on a company’s income potential. This type of valuation is most appropriate service-oriented businesses. It looks at cash flow, and uses a capitalization rate to estimate the present value of income the business will likely generate in the future.  This is more of a future forecasting model and is speculative.

Market Valuation

This type bases its valuation on industry standard sales figures, or comparable sales.  Commonly used by those who buy businesses as a means to determine fair market value for the purchase or sale of a business..

Hybrid Asset – Income Valuation

Based upon the true economic value of revenue, net profit, assets, and Goodwill.  It also calculates debt to income so the business owner can better manage to debt structure of their business.  A simpler approach for most small businesses, when structured appropriately, it can also direct the business owners attention to areas that can be improved, increasing the value of the business.

My preference is the Hybrid-Asset Valuation.  It is most usable by small business owners, generally smaller family owned enterprises and provides them with almost all of the measurements and metrics they need to effectively manage their businesses and achieve a more sustainable income and profit.

The Hybrid Valuations I use contain a combination of data from a traditional P&L statement, an examination of customers and debt.  It also includes evaluation of marketing plans for potential new business, measurement of the impact of customer service and retention along with other areas of the business the owner can improve upon.  All of it measured and compared against appropriate industry standards.  This Hybrid Valuation is ideal for small businesses of around 30 employees or less.

Business Valuations do not have to cost the owner a great deal of money and actually should be considered an investment as a management tool for the business.  There are organizations that do nothing but Business valuations and these can be quite expensive.  Some firms will offer less expensive valuations but will most often be only one of the first three I mentions; Asset, Income or Market.  A few firms will offer the Hybrid and these can range anywhere from $500 to around $1500, depending upon the firm itself.  I am also aware of a “Do-it-Yourself” version, that is around $100 and the business owner then can use the results and interpret them on their own.

Regardless of the type of Business Valuation you choose, or the approach you use to obtaining one, it is important that it not become a document that you leave in a desk drawer or file folder somewhere.  Using a Business Valuation as a key tool in improving your business ensures you are managing your business based upon facts, and not feelings, ideas or current fads.  Give a Business Valuation strong consideration for growing your Small Business.