One way you can put business valuation to good use is as a strategic planning tool. Knowing what your business is worth helps you make informed business decisions in a number of critical situations.
Many business people consider selling their business at certain point. Given the years of hard work that go into building a great business, the owners naturally are interested in the business sale price that fairly represents what their business is truly worth.
Business valuation is about risks and returns
If you have a good idea about the business earnings levels and stability going forward, you can determine what your business is worth. The methods under the income approach to business valuation are your best tools here.
Since business people have different tolerance for risk, your discount and cap rates may be different from mine. This in turn will translate into different estimates of business value.
The important point is that you can use the income-based business valuation to determine what the business is worth to you – based on your own expectation of earnings and risk.
A different perspective – market approach to valuing a business
Comparing the recent selling prices of similar businesses gives you an idea of what your business can sell for. If you have access to reliable business sales data, you can estimate your asking price, consider the financing terms required to close the deal, and see how long it can take to sell a business like yours.
Reliable business sale comps = defensible business market value
Your business valuation should include such market-based analysis. Using valuation multiples based on private business sale comparables you can assess your business market value based on its revenues, profits, cash flows, and assets.
If your data comes from reliable sources, your market value estimates are easy to defend in buyer negotiations.
Business intrinsic worth versus market value: to sell or not to sell?
Now, what if your business market value estimates fall below your income-based business appraisal result? This may well mean that, given the current market conditions, you are unlikely to sell your business for the price that truly reflects what the business is worth to you.
Let’s say your market analysis shows that you can probably sell the business now for around $700,000. In addition, you will likely need to offer seller financing for 50% of the deal, so the cash you see at close is $350,000. But your Discounted Cash Flow valuation analysis indicates that the business is really worth $1,000,000.
In short, to sell the business today would mean that you will give up about $300,000 and put an additional $350,000 at short-term risk!
Your business valuation model should include different methods
You can base your decision not to sell the business on such income and market-based business valuation analysis. Simply put, you may decide to postpone the business sale until the market conditions improve, business buyers are again able to raise adequate acquisition capital and the offers begin to look promising.