4 Business Valuation Mistakes to Avoid

Every year, thousands of business owners wonder how much their business is worth. Knowing the value of your business can help you tremendously with the planning process whether you are thinking about selling your business now or in the future. Even if you are not interested in selling your business, knowing what makes a business valuable can help you run your business more effectively, which leads to better profits and hopefully increased enjoyment in business ownership.

When it comes to getting a business valuation performed, there are four mistakes business owners commonly make. Knowing what not to do can save you a lot of heartache. Here they are:

Mistake #1: Spending too much money on the business valuation. According to IBISWorld, business valuations in the U.S. routinely cost anywhere between $3,000 to $40,000 depending on the size of the business and the complexity involved. Having that said, spending $3,000 or more on a business valuation is probably an overkill for most small business owners. For many small business owners, the intention of getting a business valuation is to get an estimate of how much business buyers are willing to pay in today’s market, which helps the business owners decide whether it is worth it to sell. If this is the intention, it is probably not necessary to spend thousands of dollars obtaining a certified business valuation that could be used in court. As the size and complexity of the business increase, valuation fees will likely increase. This is the reason many business appraisers specialize in valuing medium-to-large companies. Small business owners can often save themselves a lot of money by using a business valuation service that specializes in valuing small businesses.

Mistake #2: Spending too little money on a business valuation. The flip side of the coin is that some business owners are too cheap when it comes to getting a business valuation. There are online calculators that allow you to calculate the value of the business yourself for free. While these free services can be useful to some extent, most business owners are not trained in the business valuation process. For instance, a good business valuation service will likely involve a recasting of the company financials. Not doing this properly can lead to the business being dramatically undervalued or overvalued. As important as it is not to overspend on a business valuation, one should also not underspend.

Mistake #3: Not understanding the implications of hiring a CPA to value your business. Many people hire their CPAs to value their business. While there is nothing wrong inherently with hiring one’s own CPA to perform a business valuation, the mistake here is not understanding the implications of doing so. Many CPAs are experts at tax matters, but few CPAs are experts at business valuations. Ultimately, it is the CPA’s job to represent his or her client. During a business sale, it is not uncommon to see the seller’s CPA come up with a high value for the business while the buyer’s CPA come up with a low value for the business. If the purpose of the business valuation is to find out how much business buyers are willing to pay in today’s market, is the CPA coming up with the business value based on formulas he or she learned in school years ago, or based on an intimate understanding of how much buyers are willing to pay in today’s market?

Mistake #4: Getting the business valuation too late in the process. Many business owners only think about getting a business valuation performed when they feel the need to sell their business very soon. Unfortunately, it can also be too late to change the value of the business if they do not like the number they see. Ideally, you want to get a business valuation early in the process – preferably a year or more before you are ready to sell. Understand the factors that drive up your business valuation figure, and the factors that are hindering your business valuation from being as high as it could be. Then you have at least a year to focus on the factors that are limiting your business value, so you can get the highest price possible when you are ready to sell.

Advantage Business Valuations provides business valuation services for small to mid-sized business owners in the United States. Founded by Aaron Muller who has valued thousands of companies as a business broker, Advantage Business Valuations helps small to mid-sized business owners determine the value of their business with ease and confidence. To discover the value of your business, visit www.AdvantageBusinessValuations.com.

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