How To Determine the True Value of Your Business

Whether you’re preparing to sell your business, looking to attract investors, planning for your succession, or just trying to understand what your business is worth, the real value of your business isn’t the result of a single calculation, but rather a combination of the financial performance, market position, future potential, and intangible assets of the business.

Here are eight – (8) guidelines to help you determine the “true value” of your business:

Understand Why You’re Valuing the Business: The purpose of a valuation can significantly impact the valuation method and outcome. For instance, are you:

Selling the business ?
Merging with another company ?
Seeking investment ?
Planning for estate or tax purposes ?
Dividing assets – in the case of a partnership split or divorce ?

Each scenario may emphasize different aspects of value. For instance, a buyer might focus on profitability and risk, while an investor may care more about the business’ growth potential and sales KPIs.

Gather All of Your Financial Documentation: To get an accurate picture, collect the following information:

Annual Income Statements (Last 3 to 5 Years.)
Annual Balance Sheets (Last 3 to 5 Years.)
Annual Statements of Cash Flow (Last 3 to 5 Years.)
Business and Personal Tax Returns (Last 3 to 5 Years.)
List of Assets and Liabilities.
Accounts Receivable & Payable Aging Reports.
A List of All Existing Debts or Obligations.

Having clean, verified financial records will help ensure a realistic valuation. Poor records, on the other hand, lead to suspicion from potential buyers or investors and a lower business valuation.

Choose the Best Valuation Method: There are several recognized methods to value a business. The best choice depends on your size, profitability, industry, and growth stage.
Asset-Based Valuation: This approach totals up all your business assets and subtracts liabilities. It works well for asset-heavy businesses, like manufacturing and real estate.

Formula: [Net Asset Value = Total Assets – Total Liabilities.]

Advantages: This approach is straightforward, especially in liquidation scenarios.
Disadvantages: This approach does not account for things like your future earnings potential or goodwill.

Earnings or Income-Based Valuation: This method focuses on the company’s ability to generate profit.

Common Approaches:

Capitalization of Earnings – This valuation approach estimates the value of a business by dividing its’ expected earnings by a capitalization rate that best reflects the business’ risk and expected returns. It is typically used when the business is mature or in a steady state in terms of profitability and a quick calculation will suffice.
Discounted Cash Flow (DCF) – DCF projects future cash flows and then discounts them to present value to assess profitability or determine fair value. Like capitalization of earnings, it is used when valuing an asset, making investment decision, comparing acquisition targets, assessing intrinsic value, evaluating long-term projects, and determining the feasibility of a project, and is often used when cash flows are expected to vary over time, the business has irregular earnings, and/or the business is project-based.

Advantages: These valuation methodologies account for future performance and the time value of money.
Disadvantages: They require accurate forecasting and can be complex.

Market-Based Valuation:

A market-based valuation compares your business to similar businesses that have sold recently.

Advantages: Market-based valuations reflect current, real-world pricing.
Disadvantages: Data may be hard to find, especially for private businesses.

Multiple of Earnings: (EBITDA Multiple)

An EBITDA multiple is a common approach, especially in small business. For example, if businesses like yours typically sell for 3× EBITDA, and your business’ EBITDA is $500,000, the estimated value of your business would be $1.5 million.

Assess Your Intangible Assets: Some of the most valuable elements of your business may not appear on your balance sheet. For example:

Brand Reputation.
Intellectual Property, like Trademarks, Patents, Copyrights, Proprietary Technology, Strategic Alliances, etc.
Customer Loyalty.
Supplier Relationships.
Business Processes or Systems.
Employee Talent.

Intangible assets can increase your valuation, especially in the service and technology industries.

Evaluate Market Conditions: The external market factors below can also impact the value of your business:

Industry Trends (Growth vs. Decline.)
Competitive Landscape.
Regulatory Environment.
Economic Climate.
Supply Chain Stability.

A strong business in a booming industry is worth more than the same business in a shrinking market; similarly, a weak business in a lagging industry would also be worth less.

Adjust for Risk: The more overall risks a buyer perceives, the lower the value they’ll assign to your business. Factors that affect one’s perception of risk include:

Dependence on One or Two Key Customers.
Owner Dependency – i.e., can the leadership team run the business effectively in the absence of the owner ?
Legal Disputes or Compliance Issues.
Outdated Technology.
High Employee Turnover.

Reducing the above risks before a valuation can significantly boost the value of your business. An experienced valuation expert, business consultant, or exit advisor can help you assess and minimize your business’ risk.

Consider Hiring a Professional Business Valuation Expert: If accuracy is critical — such as in a sale, legal dispute, or investment round — hire a professional business appraiser or valuation expert. They can provide:

An Objective, Third-Party View.
Knowledge of Industry Benchmarks.
Compliance with IRS or Legal Standards.

You can find certified valuators through organizations like:

The American Society of Appraisers (ASA.)
The National Association of Certified Valuators and Analysts (NACVA.)
The Institute of Business Appraisers (IBA.)

Prepare for Buyer or Investor Scrutiny: If you’re using your valuation to engage with outsiders, like strategic buyers or investors, be prepared to:

Justify the assumptions used in your valuation.

Provide documentation for all numbers.

Demonstrate the growth potential of the business.

Address the business’ weaknesses or risks head-on.

Transparency builds trust and avoids last-minute deal-killers.

Final Thoughts:

Valuing your business is both an art and a science. While formulas and financials provide a theoretical value, the “true value” of a business likely lies in how its’ management team executes, how the business performs in its industry, the market the business operates in, and how well it can scale or sustain success.

Regular business valuations can serve as a strategic tool to help a business improve operations, plan for the future, and grow the top and bottom-line.

Hiring a professional business appraiser or valuation expert can bring a fresh perspective, and result in breakthrough insights and solutions … Whether you do it yourself or bring in a professional, understanding your business’ value puts you in control of understanding your business’ “true value.”

Did you like the content in this article ? For more information about business exit and succession planning, the author has posted his entire series of business exit and succession planning articles on the media page of his website at:

www.greaterprairiebusinessconsulting.com.

About Greater Prairie Business Consulting, Inc.:

Greater Prairie Business Consulting, Inc. is an award-winning, national consulting practice serving entrepreneurs, small to mid-sized privately held and family-owned businesses and middle-market companies of any type with revenues between $1 million and $250 million. The firm helps small, mid-sized, and middle market companies maximize their performance and exit.

Greater Prairie Business Consulting, Inc. can be reached by calling 1-800-828-7585 or e-mailing info@gpbusinesssolutions.com.

About the Author:

James J. Talerico, Jr. is an award-winning author, blogger, speaker, and nationally recognized small to mid-sized (SMB) business expert.

With more than thirty- (30) years of diversified business experience, Jim has a solid track record and an A+ BBB rating helping thousands of business owners across the US and in Canada tackle tough business problems to improve the performance of their organizations.

His client success stories have been highlighted in the Wall St. Journal, Dallas Business Journal, Chicago Daily Herald, and on MSNBC’s Your Business. He was named “Texas Business Consulting CEO of the Year,” by CEO Today Magazine, identified as a “Top 10 Management Consulting Entrepreneur to Watch” by Entrepreneur Magazine, was listed among the “10 Most Visionary Companies to Watch” by The Inc. Magazine, and has also been ranked among the “Top Small Business Consultants” followed on Twitter.

For more than half a decade, Jim was a regular guest on “The Price of Business,” a nationally syndicated radio program on Bloomberg Talk Radio and has also appeared as a subject matter expert on many FOX Radio interviews. He is a regular contributor to several blog sites and has frequently been quoted in publications like the New York Times, Dallas Morning News, Philadelphia Inquirer, The Entrepreneur’s Review, The International Exit Planning Association’s blog site, and on INC.com, in addition to numerous, other industry publications, radio broadcasts, business books, and Internet media.

Jim received a Gold “Stevie Award” for “Thought Leader of the Year,” a Gold “Stevie Award” for “Media Hero of the Year During Covid” and a Bronze “Stevie Award” for “Best Entrepreneur” in the Category of “Business and Professional Services” at the American Business Awards ® in New York City. The competition received more than 3,700 nominations and is the premier accolade for business excellence in the US honoring organizations of all sizes and industries. Jim also received an “Outstanding Leadership Award” at the Money 2.0 Conference for his contributions to the financial services industry.

Jim is the author of “8 Steps to Becoming an ETHICS FOCUSED ORGANIZATION,™” a small business certification program that utilizes a unique eight – (8) step approach for strengthening ethics in any organization. The certification program won the Better Business Bureau’s “Torch Award for Ethics” for the North – Central Texas Region, the International Better Business Bureau’s “ Torch Award for Ethics,” and a Gold “Stevie Award” for “Ethics in Sales” at the International Sales & Customer Service Stevie Awards®. Participants who complete this certification program are eligible to receive eight – (8) continuing education units from the University of Texas’ Division of Enterprise Development.

Jim received his Certified Business Exit Consultant (CBEC)® designation from The International Exit Planning Association (IEPA) to help entrepreneurs, small business owners, family businesses, and middle market companies maximize their business exit, and he received his certification in succession planning from the ASPE.

Jim is also a Certified Management Consultant (CMC)® and an active member of the Institute of Management Consultants. The Certified Management Consultant® mark is awarded by the Institute of Management Consultants USA (IMC USA) and represents evidence of the highest standards of consulting, a commitment to continuous development, and an adherence to the ethical canons of the profession. Less than 1% of all consultants in the world are Certified Management Consultants (CMC.)®