Are you troubled with the results you get from your business valuation? It is not uncommon for people to have an expectation before the business value analysis is completed. When the results you get are way off base, you may wonder what went wrong.
This may be the case whether you do your own valuation or hire a professional appraiser to do the job. The most likely reasons for unexpected business value results are these:
- Unreasonable expectations.
- Poor quality data used as input into your value analysis.
- Limited selection of methods in your calculation of value.
Business people often have goals for the business. For example, business owners planning on retirement may want a certain sum from business sale. They are disappointed if the business appraisal indicates the company is not worth as much.
The best thing to do here is to approach your valuation with an open mind. Business value is not cast in concrete. It changes over time. The best part is that you can increase business value once you learn what the company’s value drivers are. Achieving the desired value for your business should be part of the overall exit strategy.
Business value is primarily about its earning capacity and risk. If the data you put together fails to disclose the business earnings prospects, your business valuation results can be misleading. Take extra care to review your earnings forecasts. Do the numbers represent realistic goals? How will this level of earnings be achieved? What else can the management do to increase the business earning power?
The risk is the other key input that affects your business value directly. Companies with competitive products and services in growing industries are at lower risk than those competing against a few large firms in a shrinking market. A wide range of products tends to help the company make up for the inevitable changes in demand for specific products. A strong management team in charge of a motivated, skilled workforce is the most valuable asset for any company. Carefully consider how the business is positioned to achieve its earnings objectives while operating in a competitive marketplace.
There are a number of business valuation methods to choose from. Skilled appraisers use several methods because this enables them to calculate business value from a set of different perspectives. For example, the asset based methods focus on the valuable assets in company’s possession. The income methods emphasize the earning power and risk of running the company. On the other hand, the market valuation methods compare your company against similar firms whose value is already known.
Using a set of methods is always a good idea. If the various calculations produce widely different results, you have to question your assumptions and reconcile the differences. For example, the company may have highly prized assets such as intellectual property, but be struggling to put them to good use generating profits. So your income based valuation may produce disappointing results.
If you choose to use market comparison in your analysis, be aware that no two businesses are the same. The market valuation looks at company value from market evidence. In a sense, your company is assumed to be the same as any other in your selected data set. Market approach is good as a sanity check, but may well miss the value drivers that make your company unique.