While doing a small business valuation, if you’re looking at selling your company, your major concern would be what is the maximum value you can reasonably expect.
Strangely enough, THE NUMBER itself is never an absolute figure – not only does it change with external circumstances, but different people can also evaluate your company at entirely different levels at the same time.
So, what goes into a valuation process and is there something you can do to improve the pickings?
Valuation experts who could be CPAs, ASAs (accredited senior appraisers) or AVAs (accredited valuation analysts) will look at all of the following:
Assets – capital assets, intellectual property, unfulfilled contracts
Financial records – over several years, taking special note of any irregularities
Staff, investors, and customers – to understand what they think about your business
At the end of an arduous exercise, they will come up with a magical (if you’re lucky) figure – which is their estimation of what your business is worth.
Getting an independent valuation of your business can be useful for a number of reasons, besides the obvious one of divestiture. Your case will hold a lot more water with venture capitalists if there is a valuation report to back it. On the flip side, if your company is caught in a damage lawsuit, a high valuation will very much work against you.
That apart a small business valuation is always “nice to know” and puts your sometimes optimistic guesses in perspective.
Although a small business valuation may seem like a clinical number-driven game, which it is, it can yield vastly different results in the hands of different appraisers. Therefore, at any given point, you must choose the right appraiser, who is likely to give your company the most desirable valuation (usually that’s the highest number possible). Here are some pointers:
Get someone who is gung-ho: If you don’t want to be stuck with the measliest, bleakest number, don’t hire a pure accountant. An appraiser with experience of running a business or funding others is much less likely to be put off by any perceived risks. He or she will also want to assign a value to the growth prospects of the business.
Don’t forget your intellectual property: Most entrepreneurs fail to attach sufficient importance to intellectual capital – be it patents, trade names or brands. Be sure yours is included in the valuation process.
Be knowledgeable: You’re the head of your business, and you’d better prove it. If you’re the rare, delegating type of entrepreneur, it’s time to switch to a more appropriate management style NOW! Get a grip on the business, so that you can talk with authority. Make sure you know as much as possible, and certainly more than the appraiser, on the goings-on in the industry.
Know thy appraiser: We’re saving the best for last. As with any deal, it’s important for you to understand what makes the other party tick. If you’re in the entertainment business, a movie buff is likely to value your business higher than someone who has never stepped into a theater.
While a small business valuation may indeed be subjective and an art to some extent, you cannot escape the fact that at the end of the day, only sound fundamentals will do the talking. Make sure your company is in good health before you call in for a check-up.