You need a business valuation or a business appraisal. You might need the business valuation for divorce, partnership litigation, obtaining a loan, or a host of other reasons. Of course, you want the most accurate business valuation possible. How can you make sure that you obtain the best business valuation possible?
The business valuation is going to tell a story about your business. This story will contain a narrative backed up by statistics, facts, and figures. This story must make sense when it is complete. Your job as a business owner obtaining a valuation is to make sure the story, facts, and figures are clear, tie together and are supportable.
The five steps to obtain an accurate business valuation:
- Be able to explain why your product or service is so desirable you can continue to make a high profit
- Have quality financial information.
- Have leases and major contracts in good order
- Have systems outlined and resumes of key people
- Hire an experienced valuation professional.
In more detail:
1. The most important thing in valuing your business is understanding how you create and keep a market of customers that will pay enough for your product or service that you can be expected to continue making a profit – preferably a high profit. Do you have patents keeping others out? Do you have a unique distribution channel? Do you have better internal systems and people? This is the core of the business valuation. How your business makes money and how it will continue to do so. The ability to clearly and succinctly explain that is key to the valuer understanding your business and getting the valuation correct.
2. You must have quality financial information. A business valuation is to a large extent a review of your past financial results and a projection of your future financial expectations. Without clear data it is very difficult to see the details necessary to make correct assumptions and calculations. In addition to historic financial information business plans and useful projections consistently kept will add to the valuer’s understanding of the business.
3. Leases, customer contracts, loan documents, and the like may not make a business but if they are not in good order a business may suffer major losses quickly. These documents kept in good form reduce risk which increases value. Have the major legal documents your business relies on in good order and be able to provide them when asked.
4. A business is simply systems that produce a product or service for customers hopefully at a profit. Most businesses have many systems that are run by people. Truly quality systems are where “normal people obtain extraordinary results every time.” This requires great systems, great training, and very good people. Make sure you can document all of these.
5. Hire an experienced valuation professional. Clearly, the valuer must have the background to understand how the actual business works on the ground and how that translates into value. Business valuations are performed for specific purposes. While it might sound crazy it is a fact that the purpose can often significantly change the correct business value found. Make sure the valuer has been told and understands your true purpose. (DO NOT misrepresent your purpose – you will get incorrect results). Finally make sure the valuer has sufficient background, training and experience in the fundamentals of business valuation.
Being able to perform these steps are consistent with owning a well run businesses and obtaining a correct business valuation. Business valuation does have an element of the old saying, “garbage in – garbage out”. Make sure you put your best foot forward to obtain a proper business valuation.