What’s my business worth? I am sure business owners have from time to time asked that question. Knowing the answer is important for many reasons. You may want to know the answer simply because it is time to move on, retire. Or, you may be presented with the opportunity to sell to a competitor and you want to make sure that the price offered is fair. Or, you may want to gift parts of the business to family. Whatever the reason, getting the right answer will involve the services of a professional, experienced, and credentialed business valuator.
Many accounting professionals devote time and effort to learn and earn specialized skills in the art of business valuation. You will want to hire a professional who attained this specialized knowledge and experience, which will be beneficial to you when you are looking for the right answer to what your business is worth.
So, what will a business valuator do? Initially, a business valuation professional will meet with you to discuss your business in general to understand what is important to your business, that is, how do you make money (revenue drivers) and what does it cost to make money (expense drivers.) Knowing this financial information both on a historical and projected basis will help determine the right value of the business.
Another way to value a business is to look at the business assets, equipment, and inventory and then determine what it would cost to buy the same if you were starting the same business. This will determine the replacement cost, which is another way of saying the value of the business. This process, while imprecise, often will be difficult to determine without sufficient expertise in valuing the specific assets. Whereas, determining cash flow is relatively simple and thus is used more often when valuing a business.
Many business owners get caught up in thinking of value as a multiple of some other number like, “two times revenue,” “five times earnings,” or some other “rule of thumb.” While these metrics are useful, the best way to know that the value is right is to have a professional go through the process of determining your business’ cash flow and then discounting that amount to properly reflect the risks in achieving that cash flow. Then, you will have a value that will reflect the true economic reality of your business; and after all, is getting it right worth the effort?