Trying to do anything for your business without knowing it’s true value puts you at a severe disadvantage.
This is true whether you’re selling your business, seeking funding, planning for your retirement and taxes, and handling disputes.
Here at Consolidated Planning, we understand that planning for your business requires a multifaceted approach and that not every solution is right for you. Our process can provide the framework to uncover opportunities, maximize results, and put you on a solid path to achieving all that is important to you.
In what follows we’ll dive into why you, undoubtedly, need a business valuation, and five questions to consider all to help you not only prepare for your valuation but to make your succession as smooth as possible.
Why Do You Need A Business Valuation?
Notice that we didn’t pose the question as, do you need a business valuation. That’s because everything else within your business flows from a formal business valuation.
And we’re willing to bet that as it stands today, you likely don’t know the true value of your business. Maybe you have an idea or an expectation as to what that value is but you don’t really know.
A business valuation helps you do just that. Know the true value of your business.
With a proper business valuation, you do a few things for yourself and your business:
- You avoid underselling your life’s work
- You avoid overpricing your life’s work
- You streamline the process
- You save valuable time and energy
We know that this step can seem like a roadblock or nuisance at first but with the right help, it will lead to a successful and well-informed transaction. Let’s consider a few questions to get the ball rolling for your valuation.
#1 What Type Of Business Valuation Do You Need?
While there are several ways to determine what your business is worth, there are typically three primary methods that get you to the number you may (or may not) be looking for. And best of all, finding out your business valuation is as easy as ever with the tool BizEquity.
Market Approach
This option is often thought of as the simplest way to arrive at your business value. The market approach, as the name suggests, compares your business to similar companies that have been recently sold in your industry or area…your market. While this method is useful when there is substantial data available, it may be a less desirable option for a very niche business.
Income Approach
This method for your business valuation seeks to evaluate what your business earns. The income based approach takes into account future earning potential of your business, often by evaluating your current business earnings and using discounted cash flow (DCF) models to project expected income. This approach is best for businesses who have a proven track record of proven income as well as growing businesses that expect to generate future profits.
Asset-Based Approach
This method calculates the total value of your business assets to arrive at your value. Determining your net value happens by subtracting your business liabilities. The asset-based approach is suitable for businesses with significant tangible assets like real estate, machinery, and inventory and even some intangible assets such as trademarks, if applicable.
#2 What Factors Impact Your Business Valuation?
Planning for your business is something that needs to be done well in advance of making any impactful business decisions. This is especially true for your business value. That’s because many factors will impact what your business is worth. For better or worse.
- Revenue and Profitability: For the sake of sounding too obvious, this one is too important not to mention. The more profitable your business is, the higher its potential value will be. For this reason it’s important to be implementing strategies to maximize your business value well before you sell your business.
- Industry Trends: While industry trends can ebb and flow, the market demand for your industry can impact your valuation. If your business is in a growing industry it may reveal higher values than those industries with less demand. We know this is easier said than done, but it might set up this next opportunity for increasing your business value nicely.
- Customer Base: A diverse customer base can help your business in more ways than one. Amazon is a perfect example of a diverse customer base – they provide something for everyone, essentially. Now, don’t get us wrong, you can’t (and shouldn’t) seek to be everything to everyone but you CAN look for ways to expand who you serve. Businesses with only one type of customer can decrease its value by being reliant on said customer. This is especially true when you’re seeking to mitigate risk to a potential buyer.
- Company Growth: When your business can demonstrate a proven track record of growth OR the potential for future growth you can increase the likelihood of a higher business valuation. This ties in nicely with the diverse or expanded customer base we just mentioned as well as your competitive positioning. It’s important to always seek ways to position your business with proprietary offerings, products, or even intellectual property to work towards increasing your business valuation.
#3 What Are The Associated Costs Of A Business Valuation?
We know this is a big question for many business owners. As great as all of this sounds, it can, quite frankly, be a lot of work and come with some additional costs to your business. So, what will a business valuation cost you? Well, the answer is unfortunately pretty vague.
The cost of a business valuation can range anywhere from $2,000 to $30,000 or more, depending on the size of your business, the complexity of it, and the purpose of the valuation.
For simpler businesses or those needing a high-level assessment, you may pay closer to $2,000, while larger businesses needing a comprehensive valuation can expect to pay much more.
However, a great place to start in your journey to understand the value of your business, there are far more tools available to you now than ever before. A great option to gauge where your business stands today is BizEquity. This online software offers an accurate and real-time assessment of your business value.
#4 When Should You Get A Business Valuation?
Since we’ve determined it’s essential to get a business valuation, you may now be wondering, “Well, when should I have my business appraised?”
There are three times you will find having an accurate (and recent) business valuation in your back pocket is necessary.
- Prior to Selling or Acquiring a Business: This is a big one. You should never go into selling (or acquiring) a business without knowing its value. A valuation ensures you’re setting a fair price or offering the right amount for an acquisition. This just makes sense and helps protect and maximize your dollars.
- In the Event of Significant Growth: Anytime your business experiences a major change, like an expansion or any growth in general, a valuation can help you understand its increased worth and shift as necessary.
- For Strategic Planning: Even if you don’t plan to sell your business in the near future, having an up to date business valuation never hurts. Your valuation can help with long-term planning in areas of your business that could enhance its value.
You should always know the value of your business because you may never know when you’re going to need that number to make informed decisions. Plus, if the opportunity arises to sell your business, you’ll be glad you have that number.
Adequately Prepare For Your Business Valuation
Regardless of the reason you’re reading this right now, a business valuation is not something you can do without. When it comes to your livelihood, a business valuation is a powerful tool to provide further insight into both the financial health and the market value of your largest asset.
When you understand the type of valuation you need, the factors that influence your value, and potential costs involved, you can support impending decisions that have major effects on your business and even your post-retirement lifestyle.
To start planning in all facets of your business and personal life, it might be a good time to chat with an experienced financial professional at Consolidated Planning on what makes the most sense for you.
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Exp. 10/2026
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