How Do You Know If You Are Paying Too Much Or Asking Too Little For A Business?
What is a fair business valuation?
This is an age-old question and being honest, in our experience, many business owners have an inflated view of the price their business is worth.
It’s only natural to want to get the best price for such a significant asset but, even though a business has generated profits, often it’s because of the owner rather than because of the business itself.
For example, the owner may have many great relationships with suppliers or customers. Or they may be a strong personality which acts as a great marketing tool.
If you are taken out of the family business, what happens to those relationships or the marketing and, as a result, what happens to the profits?
Without systems, your business will not operate effectively so profits suffer again.
All of these are valid questions that affect the ultimate value of your business or the company you may be interested in buying. For more information on this, please read Succession Planning Business valuation methods
There are various methods and components to assess and appraise the value of a commercial enterprise. There isn’t one single small business valuation formula, rather a blend of factors which combine together to give a suitable price. The combination and relevance of the various factors will vary depending on your circumstances and your objectives from the business transaction.
These include:
- Trading history – how long has the company been in business
- Profit – what are the profits like over the last 2,3 or 4 years
- Cash-flow – how good is the cash-flow, what is the level of debtors?
- Customer base – is it a broad and growing customer base or does it depend on one large customer
- Supplier base – as with the customer base, is it dependent on one supplier who could raise prices or stop supply or are there other suppliers available?
- Forecast – what do the profit and cash-flow forecasts look like
- Goodwill – how much of the valuation is goodwill
- Competitor valuation – what are recent prices for other companies in your market
- Market conditions – is it a growing or declining market?
All of these factors and more need to be taken into consideration before arriving at a fair price. An accountant experienced in business valuations will make you purchase or sale run smoothly and help to get you a fair price.
A fair company valuation can speed up the sale process.
What we do for you
In the first place we invite you for a no obligation chat to assess your situation. When you decide to engage us to act as valuers for your business, whether buying or selling, we will then gather information from a variety of sources, analyse them and prepare a business valuation report for you.
You can take the report to a business broker, lawyer or use in negotiations with the other party so that you can reach a reasonable price for the business.
This helps take the emotion out of the negotiation which keeps discussions on a more rational basis. This can speed up the sale process and therefore reduce your professional service fees too if there is less back-and-forth discussion between advisers haggling over different perceived valuations. When you have a substantiated business valuation report, then the sale process should flow much easier.
Expert witness
We can also act as an expert witness for you in court or arbitration to assess a fair and reasonable business valuation.
For a free initial consultation, call 523 3800.
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