Myths of Business Valuation

You should know the value of your business. Whether you are trying to sell your business or not, value is a good tool to determine the overall health of your company. However, most business owners place their own value on their respective businesses, and they tend to be wrong. There are several myths that can lead to wrong assumptions.

1. Businesses within a particular industry always sell for the same rate. For example, "Businesses like this usually go for two times annual revenue." While this may work for some companies, most have various individual characteristics that make the value of the company much different than this broad based valuation approach.
2. "A competitor just sold for three times EBITDA, and we are just as good as they are." Without thorough investigation you may be missing hidden value in your company.  Owner's comp and perks must be added back to these calculations. You may also have a larger and more loyal customer base.
3. "My business does not make money so its value is negative." This is wrong. While you may have not been able to make money, your business has been able to develop a revenue stream. A good advisor should be able to illustrate what the company could generate if the company was restructured or became part of a larger company.

To properly value your company, the task must be approached with several different methods to insure accuracy. Many different assumptions can make or break your ability to get a favorable valuation. Hiring an outside consulting firm is always a good idea in this situation. Most likely, you are too intertwined in your own company, and your valuation will most likely be higher than it otherwise should be. By having a third party involved you insure a more honest evaluation.