Inspiration and Information for Starting Your Business

Factors to Consider when Valuating Your Company

A decade ago, a newsletter publisher decided that it no longer wanted one of its subscription-based newsletters, so it offered it to the editor. The valuation was zero.

The publisher priced the newsletter at zero as long as the editor would publish the newsletter long enough to honor the subscription agreements that the publisher had already received revenue for.

While the aforementioned valuation was likely done with minimal scientific inspection, most business owners seeking to determine an accurate valuation of their business should consider hiring an appraiser. Selling your business is no small matter – and it’s important to make sure you know how much your business is worth.

After all, guessing the value of your business is likely to result in either a price that’s unrealistically high and turns off potential buyers, or a figure that’s unnecessarily low and keeps you from reaping the full value of your business. Bringing an appraiser to the table will eliminate these pitfalls, and help you make the best decision possible when it comes time to negotiate a price.

Business appraisers generally are certified public accountants (CPAs) that have specialized training and experience in business valuation techniques. They use several established methods to quantify the value of key aspects of your business, and combine them into one overall figure. As part of the process they will write up a valuation report, which explains in detail how they arrived at their final value. Having a valuation document prepared by an outside expert adds substantial credibility to your asking price, since the buyer will be able to see exactly how you arrived at your final figure.

While a professional valuation appraisal can tell you the price that an average buyer might pay for your business, when it comes to negotiating with an actual buyer, the appraisal is just a starting point, but there are other factors to consider.

A particular buyer may have a strong strategic reason for acquiring your company, and may be willing to pay a premium over what the average buyer might offer. By contrast, another buyer might simply be looking for certain assets to augment his or her own business, and may not be willing to pay the appraised value at all. It’s important that the business owner and his or her broker size up the particular buyer’s reasons for acquiring your business before naming a price.

Regardless, using an appraisal to come up with an asking price makes the most sense financially. However, there are also other factors to consider when finalizing price, including:

  • What benefits of your business are most important to prospective buyers, and how can you enhance these benefits prior to the sale?
  • How might your accountant adjust your financial statements before showing them to potential buyers?
  • What are some of the methods and formulas that are commonly used to put a price tag on a business?
  • If you’re only selling part of the business, how does that affect the price?

 

Incorporation of a business followed by years of hard work to ensure success is no easy task – so when you decide to sell, it’s only appropriate that you receive the true value of the company you worked so hard to create. While many business owners feel that an appraiser is a waste of money, in the end it’s absolutely worth the investment to ensure that you are getting the best possible deal for the sale of your company.

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