Small Business by C. Norman Beckert: Why you should determine what your business is worth

C. NORMAN BECKERT, Idaho district director for SCORE, the Service Corps of Retired ExecutivesJune 11, 2013 

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C. Norman Beckert

Might you want to know the value of your business? The answer should be yes.

There are many reasons to value your business beyond thinking of selling or satisfying your curiosity. For business planning, you may want to know how your investment is doing. Going through the valuation process can help you learn about things that increase the value of your business or threaten its long-term survival. The result could be a wake-up call prompting a comprehensive review of your business.

Other reasons for obtaining valuations often include applying for an expansion loan, spinning off part of the business, disputing an Internal Revenue Service audit, undertaking strategic planning initiatives, estate or gift planning, and divorce. Perhaps you're thinking about taking on a partner or a partner is leaving the business.

You can determine the value of a business in many ways, from quick and cheap software-based calculations you do yourself to full-scale, certified valuations by professional appraisers. You will need your financial records for the last three years and perhaps longer if your business has experienced year-to-year growth or decline. Your revenue and earnings trend can help determine the future value of your business.

The financial models use past data. There are other considerations equally important that should heavily influence the valuation. For example, if there is a key customer or a few customers who constitute a high percentage of the sales, their loss could be harmful. Are there key employees, such as an engineer or salesman, whose departure would hurt your product and future sales? Could a technology change, patent fight or regulatory change affect future sales?

Customer or supplier contracts with onerous terms and penalties could affect sales or profitability. Industry trends such as consolidation may make it harder to compete. An appraiser will consider these factors.

The price range for a valuation can vary from as little as $15 for the simplest software to thousands of dollars for a detailed analysis performed by certified professionals for midsize businesses. Business brokers, hoping to represent you in a future sale of your business, may provide valuations at no cost.

None of the many valuation procedures is perfect. Most valuations are based on an analysis of forecasted cash flow that produces a present value for the business. There are accepted rules of thumb for all kinds of small businesses, in all types of industries. If your business is one of the 500 listed in the Business Reference Guide (by Tom West, Business Brokerage Press), you can see an estimate of what the pros think your business should sell for. That's a check on the valuation process you used.

A practical approach is to investigate the selling price of comparable businesses and making adjustments based on revenue, profits, competition and location.

Bankers and investors, as well as the IRS, are generally skeptical about rules of thumb. You can expect both groups to require a valuation whenever a company seeks either a significant increase in credit or a new infusion of equity capital. Professional appraisers analyze all kinds of information, including historical financial records, cash-flow forecasts, the customer base, internal controls, key employees and competitive details.

Try to match the person or method you use for a valuation with the reason you are doing it. If the valuation is for a loan, look for someone who's done valuations for that purpose. Ask your banker for a referral. The American Society of Appraisers offers a free service online to help you find a business valuation expert in your area: the Find an Appraisal Expert link at www.appraisers.org.

Treasure Valley SCORE and its partners at the Small Business Development Center have experience in helping business owners assess the value of their businesses, and there's no cost.

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tvscore@yahoo.com

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