One of the things that business owners notice when considering the sale of their business is that there doesn’t seem to be any consistency when it comes to valuing a business…
One company will value your business as X and another Y. In this article we will be answering: Who values a business? How is a business valued? and why business valuations vary so much.
Who values a business?
The valuation process is usually conducted by a professional with accounting, business sales or other industry knowledge and experience, normally instructed by a buyer or the business owner.
How is business valued?
The traditional business valuation is a largely hypothetical process based around the combined and perceived value of three key business elements:
How much are the assets (tangibles) worth?
How much is the goodwill (intangibles) worth?
Future or forecast growth and opportunity.
Some elements are straight forward to value, others are not.
Why do business valuations vary?
One of the main challenges with any valuation related to a business sale, is that the final valuation is largely subjective, there are many ways to consider value and there will always be a difference of opinion between professionals, business owners and acquirers, especially around mergers and acquisitions. This is because the value of a business is perceived in different ways depending on who you ask.
This is compounded by the fact that every business is unique, true comparable examples do not exist for goodwill or opportunity value and most importantly the ‘third party’ professional conducting the valuation can only consider the business on either a financial or standard valuation formula. For example, a business valuation prepared by an independent accountant is unlikely to see or acknowledge the full strategic value that a trade buyer would gain by the purchase of a complementary business.
As way of example on how perceived value can vary, take a gold sovereign coin originally minted in the United Kingdom. These coins when new comprise of .2354 troy oz of 22-carat gold and to this day remain legal tender with a face value of £1, so technically you could spend one in your local shop purchasing a small bar of chocolate. Take it to a jeweller or pawn broker and you should receive a sum based on the gold value by its weight, so currently £250+, however, to a collector of coins, the sovereign could have an even greater value based on condition and rarity, in 2014, a very rare Edward VIII sovereign broke all records and sold at auction for £516,000.
Ultimately while business valuations will always vary, it is still worth considering the process to help better understand your likely business value range. In addition, the process of an independent business review may also help highlight business strengths and weaknesses, furthermore, you can start to benchmark your company’s growth and start to lay the foundations for your exit plan.
Always do your research, invite offers from multiple buyers when selling and always remember that a considered exit plan with good marketing sells a business, not the valuation.