What is Business Valuation and When Should You Be Concerned About It?

When I was much younger, I use to collect comic books. I remember going to the comic book shop and gazing at the shelf for rare issues. To me, their price tags seemed big and untouchable. I wondered who had the money to spend hundreds of dollars on a few, simple sheets of paper. I would go home and put my comic books in plastic sleeves, treating them all with reverence and dreaming of the day when I could make such a fortune.

How much to sell small businessFast forward twenty years. Those comic books never made it to the rare issues shelf. They are still sitting in their plastic sleeves in my basement. Some are worth a few bucks, most are worth less than that, but I still keep them around because they remind me of my childhood. Their value isn’t based on what an appraiser or a price book says; their value is intrinsic.

A Business’ Economic Worth is in the Eye of the Beholder

When it comes to the value of your business, its worth can vary significantly depending on who is looking at it. From an outsider’s perspective, your business’ economic value may be based on one or more of three fundamental factors:

  • The net value of your business’ tangible and intangible assets versus its liabilities
  • The price for which other businesses similar to yours were bought and sold
  • The amount of income that its owners can expect to generate

As its owner you may also see value in things that may be hard to measure, such as the knowledge and experience you gained while in business, as well as the relationships that were built with customers, peers, and the community at large.

When Do You Need to Calculate Your Business’ Value?

That said, there are only a handful of times when a business valuation is really going to matter:

When you need outside financing. Managing your cash flow can be tricky business, especially if your business is going through a growth spurt. You incur expenses today that clients won’t cover for another thirty days. You need to make payroll but the check doesn’t cash until next week. One common solution is to turn to a bank for a line of credit. If your financial needs are greater, for example you are looking to expand your venue, buy additional equipment, or greatly expand your workforce, then you may be in the market for a full bank loan. If a bank is willing to take your business as collateral in exchange for financing, then getting a business valuation is important.

Selling your business. If you are considering selling your business, get a valuation before you start the process to get a sense of what your business might be worth. If you need an exit of $5 million and an appraisal says your business is worth $1 million, then you can save yourself the time and distraction of pursuing a sale. Selling a business can take months and if you know, within a rough range, how much your business is worth, it can tell you whether pursuing a sale right now is a good idea.

Attracting investors. Lastly, if you are looking for financial or strategic partners and investors, having a proper business valuation is essential. Investors will want to know what they are investing in and partners will want to know who they are partnering up with. A business valuation is only the first step in understanding more about your business.

Outside of those three key reasons, don’t get caught up in how much your business is worth. It’s like a comic book, it’s worth only what someone will pay and in the end it’s only paper wealth until you actually sell it.

Author Bio:

Jim Wang is co-founder of Plan for the Sale, a educational membership site for business owners who want to learn how to sell their business.