There are 26.5 million businesses in the United States, and although 99.7% have fewer than 500 employees, business valuations are an absolute must.
Business valuations are important at any stage of a business’s life, but especially at the point where an owner is getting ready to sell or expand. However, a poorly executed business valuation report is a dangerous thing.
To avoid relying on bad information, here are five mistakes you should never make during the business valuation process.
Choosing the Wrong Type of Business Value
There are several different ways to measure a business’s value. The most common standard of value used in business appraisals is fair market value, but many business valuations are actually done under the so-called investment standard of value. To avoid an inaccurate business valuation report, you should always research and choose the right type of valuation method for your business.
Measuring Business Value Against Accounting Profits
A business’s value depends heavily on its earning power. However, what some business owners fail to realize is that earning power lies in cash flow, not net profit. So before you inquire about business valuation services, make sure you have all of your numbers in order.
Leaving Out Key Assets and Liabilities
In order to compile an accurate business valuation report, it’s essential to include all potential assets and liabilities. Typical market-derived pricing multiples are based on what is called asset sale assumption. If you use this type of multiple, don’t forget to adjust your business value to account for all the assets and liabilities involved in your specific situation.
Failing to Assess Risks Specific to Your Company
Risk assessment is a major factor in any business valuation report. However, using capitalization or discount rates that don’t necessarily account for your company’s specific risk profile could be harmful to your business valuation.
Assuming Business Purchase Price and Project Costs Are the Same
The best business valuation tools can do a lot, but they can’t remind you that your project costs are not equivalent to your business’s value. While those costs contributed to your business, they are not necessarily a price point to work with.
Business valuation firms are equipped to handle all of these issues and more if you contact them to inquire about a business valuation report. Approximately 543,000 businesses get started every month, but without accurate valuations, they may never take off the way they should.
Don’t let these beginner’s mistakes keep you from acquiring the accurate data you need.