Do I Need a Professional Appraisal Company to Tell Me the Market Value of my Business?
It is only natural to be curious about how much your company is worth. Your business is your baby, an enterprise that you built from scratch. For you, that may make it priceless, but there is a market value to all businesses and companies, and knowing your company’s value will help reach both your short and long-term goals.
Business valuations may be performed to help you gain financing, to take on a partner, or to gift a share of your business to one of your heirs. It is also critical if you are planning the sale of your company or considering an employee stock ownership plan. Whether your reason is solely out of curiosity or part of planning the future for you and your company, you want a number that accurately reflects the value of your business.
How do You Determine a Business’ Worth?
Unfortunately, there are no formulas that will assign a value to the blood, sweat, and tears you have put into building your business. However, some methods can help determine the value of your business:
The Multiple of Sales Method
Depending on your industry, you could get an estimate of your company’s worth by multiplying your annual sales. The Business Reference Guide has developed a “rule of thumb” valuation for specific business types. If you are a flower shop owner, this guide recommends that you multiply your annual sales by 30 to 35%. You would add the total dollar value of any inventory on hand to that number to get a more accurate picture.
Comparable Firm Method
The business appraisal approach requires that you compare your business to a publicly traded one in the same industry. You will then need to discover their total market capitalization before applying a discount. That discount is taking into account that your private company is not as liquid as a public competitor is, and therefore receives a lower multiple and not be quite as valuable. Depending on your specific business structure, there could be other factors to consider, such as the cost of borrowing.
The Value of a Professional Company Valuation
As the business owner, a higher value for the business is typically in your best interest. While the methodologies mentioned above can work, they only give you a broad estimate when done on your own. Professional business valuators are aware of other factors and assets that are included in a company valuation that you might not include.
An accurate company valuation is important if you are planning the sale of your business or bringing in a partner. A higher company worth equals more cash in your pocket. A professionally prepared business appraisal is much more than just a monetary amount on paper; it should be a carefully prepared valuation report that lists the following:
- A history of the company, its background, and structure.
- Key employees, vendors, and customers involved in daily operations.
- A complete financial analysis that includes historical, current, and future trends in the industry.
- A ratio analysis that highlights financial strengths and the areas for potential improvement.
- Outlooks that identify new markets for the specific industry.
- Comparisons with industry peers, both structurally and financially.
The target audience and readers of a company appraisal should not only learn the business’s worth. Your target audience should also see the potential for growth. There lies the real value in the business for individuals or other companies who are looking to invest.
How Does a Company Valuation Differ From a Company Appraisal?
The terms valuation and appraisal are used interchangeably when discussing methods of determining what a company is worth. What they call is irrelevant so long as the scope and level of the report provided by the analysts are comprehensive and accurate.
What Does the Standard of Value Mean?
In the business world, the word value has different meanings depending on the circumstance. Generally, there are three different types used to obtain the worth of a business:
- The fair market value is the price at which a company transfers ownership when neither the buyer nor seller is under any duress to complete the transaction. The fair market value is the most widely recognized standard and is often used for tax purposes as well.
- Fair value is used primarily in court cases that involve dissenting parties such as divorcing couples or unsatisfied shareholders. The application and standards for this method can vary depending on the type of court case and its jurisdiction.
- For the merger or acquisition of a business, it is not uncommon for a special investment value to be assigned. That is because the worth of the company is partially determined by the specific investment requirements and expectations, especially when businesses are combined.
Before going ahead with the company appraisal, the analyst needs to determine which standard of value is correct for the circumstance. If it’s a dispute, and the value is obtained using the wrong standard, the result could be dismissed as being inaccurate.
Whatever your reason for wanting to know your company’s worth, your best bet is with a professional business appraisal. This not only shows you the value you have in AR, inventory, and machinery, but it can also give you a fair picture of your company’s outlook and present goodwill value.