Why You Should Get A Professional Business Valuation
What is your business worth?
It’s a complicated question.
Your business has personal value—you and your team have worked hard to build it. Then there’s the income that comes from running your business—your salary. There’s the value of inventory and the value of your property. There’s brand recognition, revenue from sales, patents, proprietary data—the list goes on.
All of these things—even the intangible, personal attachment that you have to your business—can affect business valuation. And that’s not even an exhaustive list! Those are just some of the reasons you need a professional to determine the value of your business.
We’ve created this resource to help you understand the importance of business valuations. They’re very different for Main Street small and medium businesses (SMBs) than they are for large corporations. Below, we’ll cover the techniques used for business valuations, the purpose of business valuations, and more:
What makes small and medium business valuations different
The goal of valuations for large businesses
To understand why small and medium business owners need business valuations, it’s first important to understand why large businesses get valuations.
Why? Unfortunately, SMB owners will often pay someone to appraise their business when they don’t need to. They do this, in part because they’re following in the footsteps of large businesses.
So why do large businesses get valuations? There are a variety of reasons, including:
To gain knowledge of their assets
To present the data to investors
For tax and accounting purposes
For sales or mergers and acquisitions
These large businesses (200+ employees) will use a wide variety of different valuation methods to determine the fair market value of their business. They’ll often hire a business appraiser—usually a whole organization dedicated to business appraisal—in order to determine the value of their business. They might use a number of different valuation methods, including:
Market valuation, which values the business based on the value of its shares
Times revenue method, which applies a multiplier to revenue streams
Discounted cash flow, which projects future cash flows
Each of these methods is likely to net a different value for a business—that’s because determining the value of a business is not an exact science.
Why SMB valuations are different
Now that you know about valuations for large businesses, you’re probably wondering why valuations for SMBs are so different. There are a number of reasons, but the two biggest are that:
The methods used for valuation are different
The reasons for valuation are different
The owner of a small to medium-sized business will rarely need to determine the value of their business for mergers or to present high-level overviews to their investors. These businesses are usually owned by a family, an individual, or another tightly-knit group.
For most business owners, valuations are only used when:
A shareholder is leaving the business
A shareholder passes away or gets divorced
The business is being sold
When it comes to valuations, there are a few methods you can use—but there’s one we prefer over every other. We’ll talk about that in a later section.
Here’s the point—if you own a Main Street business, you almost definitely don’t need to hire a business broker to do the appraisal. Unless something happens to a key partner in your business or you want to sell your business, an appraisal is probably unnecessary.
The goal of business valuations for SMBs
Now that you know why Main Street businesses need valuations, let’s take a look at each scenario more closely:
Changes in ownership
When there’s a change in business ownership—because a shareholder is leaving, passes away, or is getting divorced—you may need to hire a professional appraiser. These are some of the only circumstances where hiring a professional appraiser is suggested.
You’ll see some business appraisers advising SMBs to get valuations more often. In our experience in business sales, regular valuations aren’t essential—other financial statements can give you the information you need for tax and strategic planning.
Determining the value of your business can also be essential when there are shareholder disputes—but those are too complicated to address here.
Selling your business
Here’s the most common reason to get a business valuation—you want to sell your business!
When selling your business, valuation has a specific goal—you want your business to fetch a good price. Later, we’ll go over the valuation method Jason Brice uses for the businesses he sells. You should know that a number of factors are considered when valuing a business for sale, including:
The industry the business is in
Lending conditions (*more important now than in past years)
Profit as a percentage of revenue
Lease terms and related factors
When you plan on selling your business, you should hire a business broker to do your business valuation. We’ll explain why at the end of this article.
Valuation methods for SMBs
Seller’s Discretionary Earnings (SDE)
Seller’s Discretionary Earnings (SDE) is Jason Brice’s preferred method of business valuation. We love this method so much that we’ve written two articles on the topic: What is a Business Worth?, and What Are The Differences Between Net Income, EBITDA, Cash Flow, & SDE.
We highly recommend reading those articles to better understand why SDE is such a great way to determine the value of SMBs. SDE was developed explicitly for Main Street businesses—it cannot be used for large businesses.
By using SDE, buyers can understand how much the business earns, all while discounting certain costs that may change when they take ownership of the business. This makes it a clear, transparent way of evaluating what a business is worth.
Income-based valuations, asset-based valuations, and more
There are several other methods used by business appraisers to assess the value of a business. These are rarely used by business brokers for sales under $10M. —SDE tends to be the most straightforward and effective method of valuing a business. For this reason, we won’t cover the other valuation methods here—though we may discuss them in another blog post!
Why you should count on a business broker for your business valuation
When you’re selling your business, you want to get a good price for it. You’ll also want to sell it relatively quickly—especially if it’s part of your retirement plan.
Business brokers tailor the price of your business to suit these needs. By finding the right price point, Jason Brice can:
Encourage lenders to provide funding to buyers
Speed up the sale of your business
Sell your business for the price you deserve to get
You need to know everything about a business and the market in order to properly value most SMBs. That’s why you should choose an experienced broker like Jason Brice when selling your business. We offer a free informal valuation when you decide to sell with us.
Valuing a small or medium-sized business is complex—we truly hope this article has helped you understand those complexities!