Top 5 Business Valuations Myths
This video covers the top five business valuation myths so that before you make a decision about selecting a valuation provider, we can help clear up a few of the most common myths and misconceptions about business valuations that could undermine your ability to achieve your goals.
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Hi, everyone. I am Sheila Darby at Bizworth. Our latest video blog is on valuation myths debunked. Over the years, we have compiled the top five business valuation myths that we hear most commonly. Before you make the decision on which business appraiser you plan to work with, let’s clear up a few of the most common myths and misconceptions about business valuations that could certainly lead to you not achieving your goals.
- Rules of thumb are a quick and accurate way to value my business. What is a rule of thumb? A rule of thumb is a measure of unit to value your business. For example, if you hear that your business is worth 60% of revenue. That means if your business last year made $100,000,000, the value of your business would be 60% of that: $60,000,000 would be the value of your business. I’ve heard a lot of common rules of thumbs of “my business is worth five times EBITDA” (earnings before interest, taxes, depreciation and amortization). These are all rules of thumb. Your business is not a rule of thumb. Your business is based on the unique characteristics of your business and the cash earnings potential of your business or the assets in which your business owns. It is not based on an average. With that being said, there is a market approach that does look at comparable market transactions but be careful about just using a generic average. Your business is likely not average and with that average, there is likely a wide dispersion. Based on the unique characteristics of your business, you could be leaving a lot of value on the table if you use a rule of thumb. By far, that is assuming the rule of thumb even is appropriate and accurate for your business and industry.
- All business valuations are created equal. Many believe that if you pay money, regardless of how much money you pay or how little you pay, then that business valuation is credible and reliable. I will be the first to tell you that I have seen a tremendous amount of business valuations over the years, and some could be even for the court of law, and they do not hold water. They do not adhere to professional standards. Sometimes the really cheaper valuations are overly heavy on the financial ratios and they don’t actually dig into the business valuation or how they came up with the business valuation. It’s based on a rule of thumb. So, all business valuations are not created equally. So be careful and be wary.
- My CPA can value my business. CPA’s are extremely knowledgeable. I’ve met a lot of CPA’s and I have a lot of CPA friends and they’re extremely knowledgeable about what they do. Unless your CPA is a certified business valuator, then your valuation of your business will not adhere to professional standards, will not be credible or help you through negotiations, and will not hold up with the IRS in case of an audit. So again, be careful of using CPA’s for business valuations. Unless they’re certified, then you need to get a certified business appraiser to value your business that will adhere to professional standards.
- The value of my business is equal to its assets, minus its liabilities (net worth). Here you want to be careful. Most will agree that this method has serious flaws because it’s based on book value and this can materially underestimate the value of your business. The cost of your assets and liabilities are a historical cost and also have depreciation counted toward it. So already your valuation is going to be lower with this method. There are other similar methods, such as the adjusted net assets method where you mark the assets and liabilities to market values, but again, this could grossly underestimate the value of your business so be careful and understand how you’re valuing your business and why.
- I don’t need a business valuation to sell or buy my business. Well, certainly a business valuation is not required to buy or sell a business. It certainly helps you avoid from overpaying for a business or undervaluing your business if you’re selling. At the end of the day, we’ve helped so many owners over the years and they keep coming back to us and saying, I felt extremely knowledgeable about the value of my business and why the value should be within the range that it’s in. They were able to negotiate better, speak more intelligently with brokers or potential buyers, and at the end of the day, just feel confident and feel good about the value they’re receiving or paying for a business.
I hope these top five business valuation myths have been dispelled. I hope this video blog was helpful. Please reach out if you have any questions. If you go to our web site, www.BizWorth.com, you can schedule an appointment to meet with me or one of our advisors to talk about your business valuation. Even if you’re not sure it’s the right time for a business valuation, hop on a free consultation and let’s talk through that. We’re always happy to help business owners so feel free to reach out. If you like our content and would like to see more, visit our blog or follow us on Facebook, LinkedIn, and YouTube. Thanks so much.
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