Several times during the life of a company, you’ll need to value its worth. A brand-new company may need an angel investor who asks for an accurate estimate of your cash flow. In contrast, you might have a strong business that simply needs a new owner to flourish even further. Many business owners find it difficult to value a business, but it simply takes some attention to the accounting figures in order to arrive at a precise number.
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Consistent Earnings
The first step to take with any valuation is pulling out historical statements. Regardless of your debts and assets, the company needs to show consistent earnings from profits, investments and other ventures. Ideally, each business quarter should be in the black by a large margin. A business has a higher value when it doesn’t have volatile sales numbers creating a roller-coaster ride across the general ledger. Investors will look upon giant dips and leaps with a skeptical eye. That type of business may hit a low spot and never recover. As a result, the business has a lower value in the eyes of buyers or investors.
Steady Cash Flow
Strong earnings are entirely different from steady cash flow, and this distinction often hinders a business owner from properly valuing the company. You might have thousands of dollars in earnings one quarter, but the company checking account holds only $1,000 at any one time. A high-value company has cash flow that’s ample in size. Ideally, there should be thousands of dollars in several accounts in order to cover all the business’s debts. Accounts receivable may dip slightly one month, but that loss shouldn’t severely impact the checking account. A strong cash flow means the business isn’t always taking out loans to cover temporary expenses, such as paying out the payroll.
Projected Sales Spreadsheets
Most businesses project their sales for a year or longer. These numbers must be accurate in any marketplace so that the owner can prepare for large purchases or potential slow periods. Be honest with these projections, however. If you’re planning on selling the business, your skills won’t be part of the equation anymore. The business might be worth less if you aren’t part of the company. When you train a loved one to take over for you, however, these projections may still hold true because those skills will still be available to please the customers.
Tangible and Intangible Assets
A business has many assets that can be counted toward a healthy valuation. Manufacturing equipment, vehicles and other high-end items contribute to the business’s success without much investment on those items each quarter. Maintenance might be the only cost on assets that are entirely paid off. There are other assets that are referred to as intangible types. Your partnerships in the industry that are based on respect and camaraderie may equate to an exchange of ideas or parts. These assets are difficult to value because they aren’t concrete items. You’ll need to evaluate how these intangible items affect your business in both positive and negative ways before making a final valuation.
Potential Liabilities
No business owner wants to admit that he or she has liabilities, but it’s a fact of most industries. Take a hard look at potential lawsuits from customers or employees. Their possible payouts are liabilities to the company’s overall value. The business may also have an environmental issue, such as pollution affecting a nearby community from factory runoff. List all of these items as negative components to your business’s value. They will play a part in the business’s life at some point.
Check Emotions at the Business Door
Many business owners value their company at a highly inflated number because of basic emotions. The company may have been started by grandma, and now the grandchildren need to sell it for financial reasons. Business values cannot be defined by the emotion of the situation. The company’s reputation in the marketplace can be a helpful indicator, but you need to keep your emotions controlled as you calculate an accurate value.
Business owners may be great at sales and partner contracts, but accounting might elude them. It’s not a downfall to hire an accountant who can accurately value a company. These professionals can provide an unbiased assessment of the company so that you can be honest about the valuation among interested parties. In the end, you’ll avoid any financial mistakes that might hinder a sale or investment opportunity.
