It is imperative to receive a professional business valuation. A general opinion of value or estimate is not enough to gain a full understanding of your company’s worth. More notably, potential buyers are not likely to trust your asking price if you cannot justify it properly with a professional valuation from a qualified, experienced, and trusted business broker. In this review, we discuss why you should trust a business broker to do your business valuation, further highlighting the importance of a valuation, the benefits, and the different types of valuations.
The Importance of a Professional Business Valuation
A professional business valuation determines the worth of your company. This could be based on the company’s assets, income, or its market value (see types of valuations below). A business valuation from a qualified business broker helps business owners understand how their company is performing and what opportunities are available now and in the future.
There are different purposes for a professional business valuation. Of course, the most popular reason is to determine the market value of a company in preparation for a business sale. However, there are other purposes. Here are some of the most common reasons business owners order a professional business valuation:
- Succession planning
- Estate and gift taxes
- Buy/sell agreements
- Mergers and Acquisitions
- Insurance purposes
The Benefits of a Professional Valuation From a Business Broker
In general, a business valuation helps you make better decisions and plan for your company’s future. This includes decisions and planning in regard to your exit strategy and the future sale of your company. Here are three key benefits of a business valuation from a business broker.
Calculate (and Justify) Your Fair Market Value During a Business Sale
This is perhaps the primary purpose (and benefit) of a business valuation from a qualified business broker. A professional value provides an accurate depiction of how much potential buyers are willing to pay for your company on the market.
This allows you to make more informed decisions about your exit strategy. For instance, if you receive a friendly valuation, then you may find it best to sell right away. In other cases, the business owner may decide to work on their value and sell at a later time.
Make Informed Decisions to Improve Your Company’s Value
An objective valuation from a qualified business broker gives you a better sense of how to improve your company’s value. Experienced business brokers should explain the problems your company has. It is not always easy identifying these issues on your own, but an outside expert can. This information helps you take steps to improve your value over time.
More Leverage During Negotiations
A buyer is not likely to “take your word for it” in regard to your asking price if you have not received a professional valuation. They may conduct their own valuation, which lands far short of your company’s asking price. Without a well-developed business valuation from a business broker, you may lose negotiating power, which can lead to agreements to sell below the full worth of your company and/or your company sitting on the market for an extended period of time.
The Different Types of Business Valuations From a Business Broker
There are different types of business valuations your broker may recommend. The type of business valuation depends on your purpose. The three primary types of valuations, which are market-based, asset-based, and income-based valuations. Some brokers offer an opinion of value, which is less dependable. Below is a closer look at each type of valuation from a business broker.
A market-based approach determines the value of your company on the market. In other words, this is how much a reasonable buyer is willing to pay for your company, also known as your fair market value (FMV). This is the most common type of business valuation for business owners who are planning to sell their company now or within the next few years.
An asset-based approach focuses on the assets your company possesses. Specifically, it determines your company’s net asset value (NAV). This may be recommended if your company’s value is directly related to its tangible or intangible assets. In other cases, an asset-based valuation is conducted during the purchase of a company along with market-based business valuation.
An income-based approach focuses primarily on your company’s financial metrics and less upon the current state of the market or its assets alone. Metrics such as current cash flow and growth rate are considered during an income-based business valuation. An income-based approach is often used along with a market-based valuation during a business sale.
Opinion of Value
Business owners should avoid business brokers who simply offer an opinion of value. This is an estimated projection of what your company may sell for based on the business broker’s experience and history. It is far more subjective than the aforementioned types of business valuations. Other types of valuations are based more on objective metrics (rather than opinion), which provides a more reliable and trusted idea of your company’s worth.
Receive a Free Business Valuation From Sigma Mergers and Acquisitions
We offer free, no-obligation business valuations at Sigma Mergers and Acquisitions. We use a market approach if you are selling your company to determine how much potential buyers are willing to pay for your company. To learn more and to receive your free business valuation from a business broker, contact us today.