The Nuts and Bolts of Valuing a Business

In our last article we discussed just how important it is to disclose the motive for obtaining a business valuation.  Valuations may be required for estate planning, due to divorce or partnership dispute, or for a number of other reasons. In most cases, however, when a business owner comes to me and asks me about the "value" of their business- what they really want to know is  "what do you think I can sell it for?" I wish the answer to that question involved a formula like "Multiply the number of hours you have put into this business by 1,000 and the amount of capital you invested by 2.  For every family event you missed to take care of business, add a million dollars.  Apply a multiple of 10 for every day you didn't quit when the going got tough, and instead toughed-it-out.  That's what your business is worth." Like I said, I wish that was the formula.  Unfortunately, it's not. The "Fair Market Value" of a business is: “The price at which the property would change hands … [Read more...]

Business Valuation: Do the Financials Tell the Whole Story?

Many experts say no! These experts believe that only half of the business valuation should be based on the financials (the number-crunching), with the other half of the business valuation based on non-financial information (the subjective factors). What subjective factors are they referring to?  SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats – the primary factors that make up the subjective, or non-financial, analysis. Below you will find a more detailed look at the areas that help us evaluate a company’s SWOT. Industry Status – A company’s value increases when its associated industry is expanding, and its value decreases in any of the following situations:  its industry is constantly fighting technical obsolescence; its industry involves a commodity subject to ongoing price wars; its industry is severely impacted by foreign competition; or its industry is negatively impacted by governmental policies, controls, or pricing. Geographic Location – A … [Read more...]