What Business Owners Get Wrong About Valuation
Considering the time and sweat equity an owner puts into their company, they might have exaggerated ideas about what it’s worth. Unfortunately, when a valuation analyst comes in to crunch the numbers, apply their expertise, and make projections, the value they arrive at might be a bit of a letdown for the owner.
In a recent article on Axial, author Al Danto enumerates common misconceptions about value:
There is one “right” way to assess value. Not true. There are many ways to value a business. Experienced valuation analysts choose the appropriate approach—income, market, or cost—along with the valuation standard that fits the valuation purpose and use. Each valuation is different and based on the target company’s specific circumstances.
Lots of assets equal lots of value. Value depends on a company’s ability to generate cash flow. For example, in asset-heavy companies, equipment and machinery are integral to the company’s operations. Liquidating assets is not the way to create return on investment in an ongoing company. If the company can’t operate, it can’t generate cash flow.
I can expect a valuation in line with industry average. Wouldn’t it be nice if valuation were this easy? Even companies in the same industry can have a wide range of value because every company has a unique set of circumstances. It may seem that similar companies share risks and variables, but a deep dive into the numbers will reveal distinct conditions.
I can bolster cash flow by adding back personal expenses. A big no-no. The company’s finances must be accurate, and personal expenses can make for an unrealistic view of the company, its finances, and its value. Failing to clean up the finances puts the sale at risk of falling apart at any step in the process.
After the years of hard work you put into building your business, getting an accurate valuation is the first step in ensuring you’re rewarded. Members of the National Association of Certified Valuators and Analysts (NACVA), Dembo Jones’ business valuation team has decades of experience assisting business owners with preparing their company for sale as well as ensuring a worry-free transaction that maximizes return. Contact us today.