What’s my business worth?
In a recent study, business owners were asked what they estimate the value of their business to be. 10% didn’t have a clue. The other 90% answered in a wide range between $500,000 and $100 million.
Further when asked how they arrived at that valuation, 2/3 answered that they had no specific method, or they used some kind of informal methodology. Only 1/3 answered that they obtained an independent valuation from a qualified professional.
There are two primary reasons for knowing the true value of your business:
- To make informed decisions about the future of your business. Knowing the value of your business can help you make informed decisions about its future, such as whether to sell, expand, or make other major changes. For example, if you know that your business is worth a significant amount of money, you may be more likely to consider selling it in the future. Or, if you know that your business is growing rapidly, you may be more likely to consider expanding into new markets.
- To attract investors or partners. If you are looking to attract investors or partners, knowing the value of your business can be a valuable asset. Investors and partners will want to know how much your business is worth before they commit any money or resources. By having a professional valuation, you can show potential investors and partners that your business is a sound investment.
As mentioned, there are some informal methodologies out there that can give you a rough idea. Professional services firms can be valued as a multiple of revenue, other firms can be valued by a multiple of cash flow (the investment community calls cash flow, EBITDA, which is an acronym for earnings before interest, taxes, depreciation and amortization).
However, if you want to know the true value of your business, you should get a valuation from a professional that is independent from your organization. That person will use three methods: the asset-based approach, the income approach, and the comparable sales approach to come up with the valuation. Typically, our business is the largest asset on our personal financial statement. We should know the value to make informed decisions.