|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
The Importance of Valuing Your Business Now
Do you know what your business is worth? It’s not unusual for business owners to wait until they consider the sale of their business before trying to put a price on it. It shouldn’t be surprising then that business owners are often disappointed when they eventually appraise their business. However, if a valuation is done well in advance of the sale of the business, there is ample time to take steps to increase its value.
There is both a science and art to valuing a business but, ultimately, the value of a business is based on many factors that have little to do with the methods used to value the business.
The Science of Business Valuation
While there are several methods that can be used to value a business, business valuation professionals, also referred to as certified valuation analyst, typically apply one of two methods as a starting point.
Income approach: This utilizes such factors as past, current, and projected cash flow, earnings, and revenues and applies a multiplier to determine a base value. The multiplier varies depending on the type of business and the industry.
Asset approach: This approach focuses solely on the fair market value of the assets owned by the business, less its liabilities.
The Art of Business Valuation
While the science of business valuation is reasonably straightforward, there are typically variables and intangibles that must be considered. That’s where the art of business valuation comes in, which is often a subjective analysis of many factors, including the business’s employees, customer base, contractual arrangements, industry trends, market position, and environmental or regulatory issues. These are factors that, at any given time, can be perceived differently from one buyer to the next.
Depending on the type of business or its circumstances, some combination of methods may be applied. However, in many cases, the sale price or deal structure may be determined based on who is buying the business. For example, you are more likely to receive a higher price for your business if you sell it to a third-party buyer rather than a family member.
Don’t Wait to Value Your Business
Even if you’re not considering the sale of your business, there are several reasons why you should have your business valued sooner rather than later. For example, you can’t properly fund an estate or business continuation plan if you don’t know the value of your business. Also, if you seek capital from a lender or investor, you will need a business valuation. You will also have a better idea of the specific aspects of your business you need to improve to increase its value. At the very least, it gives you a critical benchmark that allows you to measure your progress.
Steps to increase the value of your business
By understanding the key factors that go into valuing your business, you can concentrate your efforts on improving those aspects of your business that will have the most immediate and visible impact on its value.
Increase Cash Flow
Cash flow is the most heavily weighted factor in determining the value of a business. Some quick ways to increase cash flow include:
Businesses with growing revenues have more value than businesses with flat revenues. Ways to increase revenue include:
The way successful businesses increase their value is by adding value to everything they do for their customers by
Businesses with robust systems and repeatable processes typically have more efficient operations, leading to more substantial cash flows and higher profit margins.
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