Some of the basic questions all business valuations seek to answer include:
· What is the value of the business’s assets?
· What is the value this business can offer interested buyers?
· What would a similar business sell for on today’s market?
That may sound simple enough, but depending upon the industry, the sector, and the individual business in question, a business valuation will follow a different approach.
Think about it this way: would a manufacturing business and an accounting practice with the same revenue sell for the same price? The value of a manufacturing company is heavily reliant upon the hard assets used to create their final product. While an accounting practice will use some hard assets, most of their value lies with its customers (especially reoccurring customers).
If you want to determine the value of your business, identify where that value lies. What products or services keep you in business? Why do your customers come back time and time again? What would a buyer be willing to pay for your business? What rules of thumb are used to determine the value of businesses within your industry?
By having a good understanding of your business’s value, you will know what to expect from a business sale and you’ll be able to identify which buyer offers make sense and which don’t. Furthermore, if you are able to determine the key value drivers in your business, you can find ways to increase that value and ultimately be able to maximize your business’s selling price! If you don’t believe me, let Warren Buffett convince you. During a Berkshire Hathaway last year, Buffett made a comment all business owners may want to pay particular attention to:
“If business schools could offer just one course, it would not be on stock trading, the efficient market hypothesis or modern portfolio theory. Rather, business schools should be encouraging students to learn the boring but critically important discipline of business valuation.”
Stay tuned for our next article on this topic!
Submitted by Jey Arul