Business Valuation Blog | Understanding Buying / Selling a Company

What Can a Business Owner Learn from a Business Evaluation?

Posted by Business Valuation Specialists LLC on Sep 10, 2015 9:30:00 AM

business_evaluation

Did you ever try to calculate your net worth? Your net worth tells you how well you are doing from a financial point-of-view. It is derived by adding up everything you own (your assets) and then subtracting everything you owe (your liabilities). Financial instruments like stocks, bonds, and CDs are easy to value and you probably can make a pretty educated guess on what your house, vehicles, and personnel possessions are worth. If you own a business, you should have a business evaluation to help you determine your net worth.

Curiosity about your net worth is hardly the only reason for doing a company valuation. In fact, it is probably one of the lower-ranking reasons to pay for a business appraisal. Here are some situations when business appraisals are worth the money.

You are interested in selling your business

Maybe it is just time to move on and you want to start a new venture. Perhaps you are getting too old and want to retire. Whatever your reason for wanting to sell your company, you'll want to know what it is worth. You may not want to get the very last dime out of your company, but you probably do want to at least get fair market value. Having a business valuation can give you a good starting point when you negotiate a sale.

If it has been a while since you last had a business evaluation, many things could have changed. The economy could have gotten better or worse. The demand for your type of business could have gone up or down. Competition, shifting demographics, and new technology could all change the valuation of a company over time. Business valuations should be done as close to the proposed sell date, preferably no more than six months before the business is sold. 

You decide to bring in an equity partner

Your company may need working capital or an injection of cash to continue normal operations or expand. If you are a small to medium-sized company, it may be hard to get a loan from a bank and alternative funding sources may have onerous terms. In such a case, you might consider taking on a partner. In exchange for giving up some control and a percentage of your company, an equity partner will "buy-in" to your business.

Once you find a suitable partner, the only other bit of business that needs to be done is to determine how much money your company is worth and the percentage of your company that the investor/partner will receive. The best way to come to a fair arrangement is to get a professional business appraisal.

You want to get a loan from the bank

Getting a small business loan from a bank is harder than it used to be, but it is not impossible. While banks have tightened their lending standards, they still do issue loans to established businesses that meet certain benchmarks. The amount of money a bank would be willing to lend depends on their confidence in being paid back. The loan may be asset-based, based on your company's monthly revenues, or some other benchmarks.

It is highly doubtful that the bank would loan you a substantial sum of money without some proof of what your company is worth. They may require a business evaluation from a certified business appraiser before they will approve a loan. Be armed and ready with that information before you walk into a bank and ask for a loan.

Are you are making a reasonable return on your investment?

All businesses are investments. You put money into your business and you should expect to earn a return on that money. A company valuation can show where you started (your initial investment), what you added over time (new assets), and where you stand today (appraised value). The difference between what you invested and what your company is valued at today is your return on investment.

Topics: business valuations, business evaluation