6 Differences between a Business Valuation and Property Valuation

In the world of small business, building good relationships is key. It is not uncommon for many small business owners to ask their favorite real estate agent to tell them how much their business is worth. While a real estate agent might be well practiced in valuing properties, he or she may not necessarily be an expert in business valuation. Here are six differences between a business valuation and a property valuation:

Difference #1: It is hard to compare one business to another. Real estate brokers frequently use the comparable sales approach to valuing properties. If you want to know how much your house is worth, you would look up how much similar houses in your neighborhood have sold for recently. Unfortunately, it is difficult to compare one business to another. Every business is run differently. How do you determine whether a business is truly comparable to yours without knowing exactly how it is run?

Difference #2: It is hard to access business financials of privately held companies. Assuming you have identified several businesses that are “similar enough” to yours, the next challenge is getting access to their financial data. Unless the company is publically traded, there is no requirement for privately held companies to disclose their financial data to the public. Not having any financial data can make it difficult to compare the performance of your company to theirs.

Difference #3: It is hard to find sales data for business valuations. When a property gets sold, the sale price is part of public records. Real estate professionals have access to various databases that allow them to pull up the sales data easily for comparable properties that have been sold recently. In contrast, finding the sale prices of businesses can be a challenge. Unless the company being sold is a publically traded company, the general public cannot look up the sale price of a business. Even if we are able to identify comparable businesses and gain access to their financials, the sale price of the business could still be a mystery.

Difference #4: The asking price of businesses is even more meaningless than the asking price of real estate. When the sales data of businesses is so difficult to obtain, one might be tempted to judge the value of a business by looking at the seller’s asking price (which is often readily available on business for sale web sites). After all, most sellers of real estate start with an asking price that is not too far off from the final sales price of the property. Unfortunately, this logic does not hold for business sales. The asking price of businesses can vary dramatically from the final sale price of the business. Many businesses are never sold. Just seeing the asking price of a business tells you very little, if anything at all, about how much the business is actually worth.

Difference #5: The financial statements of many companies need to be adjusted for business valuation purposes. When it comes to reviewing the financial statements of a rental property, the income and expenses are fairly straightforward. The income section consists of rents paid by the tenants, and the expense section consists of expenses such as property taxes, insurance, maintenance, etc. On the other hand, the financial statements of businesses often need to be adjusted for business valuation purposes. Many business owners try to minimize their bottom line in order to minimize their tax obligations, and certain expenses need to be pulled out and added back to reflect the true discretionary cash flow the business.

Difference #6: Business value does not always go up over time. If you hold a piece of property for 30 years, chances are it will be worth more in 30 years than it is worth today. In contrast, business value does not always increase just because the owner has owned it for many years. Granted, having been in business for a long time is a positive sign since it proves the business can weather the ups and downs of the economy. However, this favorable operational assessment can often be overshadowed by the financial performance of the company in the recent years. In other words, if your business was a lot more profitable 30 years ago than it is today, it can be difficult to convince business buyers that your business is worth more today than it did 30 years ago.

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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