Understanding how much your business is worth can be an important piece of knowledge to have for a variety of reasons. You might be seeking to sell your business, or find investors, or take a loan and in all cases, you need to have a sense of how much it is worth before you can undertake next steps.
There are a variety of ways to determine the worth of your business, but at the end of the day, beauty is in the eye of the beholder. Your business is worth what someone is willing to pay for it and not necessarily what your financial statements suggest. So if you are trying to pin down an actual number, and to assess the true value of your business, you may want to start by asking yourself these five questions.
- Why do you want to know what your business is worth?
While this may seem like a silly question, your motivation for wanting to know your company’s value may reveal important information.
- Are you seeking to sell? If so, why?
- Has something gone awry? Has the market changed?
- Has someone expressed an interest in buying your business?
- Are you looking to understand how you stack up against the competition?
Understanding this broader picture can reveal factors that impact your company’s value.
- Does your business rely on your relationships?
In most owner-managed businesses, goodwill goes a long way. The relationships you forge with your network of contacts, suppliers and customers can drive business success. Whether or not that goodwill can be transferred to a new owner can dramatically impact your company’s value. If the goodwill resides exclusively with you, how much your business is worth will largely be a function of whether or not you are at the helm.
- What assets do you have in the business?
Does your business rely on expensive machinery and equipment? What about the technology that you use? What is the condition of these assets? The value of the ‘tools’ on which you rely necessarily impacts the overall value of your business. If you have machinery and software that needs to be replaced, it could negatively impact the value of your business. Conversely, if you recently purchased expensive equipment that is in excellent shape, your business could be worth more.
- How wide/deep is the customer base?
Where and with whom you do business matters. Is the customer base widespread, across geographies, or is most of the revenue generated from a very small and select group of customers? The value of your business depends on the scope of your customer base, as well as the contracts you currently have in place.
- Are your financial statements up to date and reliable?
Not all financial statements are equal.
Unaudited financial statements, for instance, would not necessarily contain all of the information required to allow for a determination of value. The last five years of historical financial information can provide good context, and a professional accountant will be able to assess areas of value and potential areas of vulnerability.
This type of analysis, along with the answers to the other four questions, should offer a good sense of what your business is worth.
Miller Bernstein can help co-ordinate the valuation process for you. Contact them today to get started.