While you might not be thinking about selling your company any time soon, it’s still important to ask yourself, “What’s my business worth?” Many entrepreneurs have a long term vision to develop their company and increase its worth, then sell when they can get the highest price. However, experts estimate that up to 75% of business owners don’t have an accurate calculation of their enterprise worth.
How to Establish What Your Business is Worth
The problem you might share with the heads of most companies is that you don’t understand the factors that weigh into a business valuation. When you’re faced with an offer from a potential buyer, you might be ruled by emotion or trust guidelines that are too general. In most cases, you’ll overestimate the value of your company based upon sweat equity and how much the enterprise means to you personally. This leads to an inflated view of the true market value, rather than a true appreciation of what your business is worth. Therefore, it’s important to know when you need to turn to a professional for advice.
Trust the Professionals
There are several pointers that financial experts utilize in order to establish an accurate business valuation.
1. At the outset, you should figure out how much revenue the new owner will need to generate in order to turn a profit. A company’s worth should be calculated by looking at net profits and certain designated expenses. Often, you’ll seek to reduce earnings by claiming expenses on your tax return in order to gain favorable treatment. However, you’ll want to utilize a completely different formula when assessing your business value.
2. Another formula to determine a company’s worth is Percent of Revenue. In this scenario, business assets are disregarded as being an inconsequential factor. They might add or reduce value if included in A/R, Inventory or Works in Process. Instead, sales figures are analyzed to assess the market.
3. Assess your specific industry when asking – what’s my business worth? There are many free tools you can access online to obtain your North American Industry Classification System (NAICS) or Standard Industrial Classification (SIC) codes. While not the only determinant, these are useful when comparing your company to others in your field.
4. Keep in mind the rate of growth your company has experienced. If you’ve had a boost over the long term, you might actually have a higher value than the going market rate.
5. Make sure to employ several sources when analyzing your company’s value. If you’re ready to sell, you cannot rely on the buyer to make an accurate determination any more than you can when selling a home or car. You need the assessment of a professional, third party to ensure that you’re not selling for below-market value.
Even if you’re not ready to sell your business, smart business owners can still benefit from answering the question, “what’s my business is worth?” Depend on the experts and professional standards to evaluate your business value rather than rely on conjecture or emotion that leads to underselling your treasured enterprise.
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Veriti Consulting, LLC is a professional business valuation firm who provides business valuation services to companies and organizations across the United States. To learn more about all of our services call 855.232.4410 or contact us via email.
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