98% of owners overvalue or undervalue their business. Either can be detrimental. Find out why an accurate valuation is crucial, even if you're not looking to sell anytime soon.
One of the most important questions a business owner can ask is: "How much is my business worth?" It's a critical question to ask whether you're thinking about selling your company, planning for the future, or simply curious about your business's recent growth. Understanding business valuations can be complex, but the implications of not knowing what your business is worth can be disastrous.
Why Business Valuations Matter
At its core, a business valuation provides an estimate of what your business is worth in the current market. While a professional valuation will provide you with the true fair market value, it's extremely common for business owners to undervalue or overvalue their businesses. A recent survey conducted by M&T Bank found that a staggering 98% of small business owners didn’t know the value of their companies. They either have an overly rosy outlook for the business, or grossly underestimate its potential.
Many business owners undervalue their businesses because they don't recognize the full range of assets and potentials their business holds. They might consider tangible assets like equipment, inventory, and property but neglect to include intangible assets such as intellectual property, brand reputation, and customer loyalty. Often, business owners are so consumed with the day-to-day operations that they overlook the value in their unique market position or the competitive advantage they've cultivated over the years.
On the other hand, it's just as common for owners to overvalue their business due to emotional attachment and unrealistic expectations. After investing years, if not decades, into building their business, owners often see things through a sentimental lens. This emotional attachment might cloud their judgment and result in them desiring an asking price that doesn't align with market realities. Additionally, some owners might have false expectations about the market demand after hearing anecdotal success stories of other businesses. Or, they may overestimate specific features of their business and assume that buyers will see the same value they do. Whatever the case may be, inflated expectations can lead to all sorts of problems. At best, it results in disappointment when realistic offers come in below their anticipated price. At worst, it could mean prolonged listing times or unsuccessful sales attempts.
What Goes Into a Business Valuation?
Look, it's no surprise that buyers and sellers rarely share the same gut feeling about how much a business should be priced at. That is precisely why a valuation is necessary—to provide an accurate figure that reflects the true market value of the business. But what exactly goes into the valuation process? A thorough business valuation by a trained professional will consider various factors, including:
Financial Performance: This includes revenue, profits, and expenses.
Assets: Physical assets like equipment and inventory, as well as intangible assets like intellectual property and brand value.
Market Conditions: Current market trends and economic conditions.
Growth Potential: Future earnings potential and expansion opportunities.
Industry Comparisons: How similar businesses are performing in the market.
While a company's recent financial performance usually has the greatest impact on the valuation, all these factors can have a significant positive or negative effect on a business's fair market value at any given time. It's also worth noting that changing market conditions, especially industry demand, can sometimes result in a business valuation jumping from $3.5 million to $5 million in less than a year.
The Importance of Keeping Your Valuation Updated
Keep in mind that a business valuation is not a one-time event. In a recent podcast episode, Joe and Chandler addressed the question "How Long Is A Valuation Good For?" They pointed out that things can change rapidly in business, from economic conditions to internal developments. "It's not that your valuation has an expiration date," Joe clarified, "it's that your business has changed and the market has changed."
Chandler suggested that "every time something changes, you need an update." This means that getting your business valued should be a regular occurrence. For best practice, we recommend updating your valuation every six months to ensure it reflects the current state of your business and the market.
Benefits Beyond Selling
While an accurate valuation is critical when you’re planning to sell, it’s also invaluable for other aspects of business management. As Joe explains, "Your valuation is useful, not just for selling your business, but also as a benchmark for your business." Knowing your business's value helps you make strategic decisions and track growth over time. A regular valuation provides a clear picture of where your business stands, financially and operationally, at any given moment.
For instance, understanding your business's value can inform decisions about expansion, hiring, and investment. If the valuation reveals that your business is performing well and has strong growth potential, you might decide to reinvest profits into new projects or expand into new markets. Conversely, if the valuation indicates areas of concern, you can address these issues proactively, whether that means cutting costs or refining your marketing strategy.
Many business owners don't even consider selling their business until a potential buyer shows interest. However, if you don't know what your business is truly worth, you'll find yourself at a significant disadvantage. Without a current valuation, you lack the necessary information to justify your asking price or to counter the buyer’s offer effectively. This can result in either undervaluing your business, where you might settle for less than it's worth, or overvaluing it, which could scare off the potential buyer. Having an up-to-date valuation eliminates that concern and ensures you understand your business's true market value at all times.
Staying Updated with Real-Time Valuation Tools
In addition to professional valuations, there are tools available that can help you keep a real-time check on your business's worth. Programs like TodaysVAL offer ongoing insights into your business's value, which can be incredibly useful for day-to-day management and long-term planning.
At Robbins Pellegrino, we provide detailed, professional business valuations that take into account the full picture of your business. Our valuations are designed to be as accurate as possible, reflecting current market conditions and providing you with a solid foundation for whatever business decisions you face.
What It All Means
Understanding the true value of your business is essential for any business owner. Whether you're planning to sell, looking to grow, or just want to know where you stand, a professional valuation offers the clarity and insight you need to succeed.
At Robbins Pellegrino, we’re here to help you get the most accurate and up-to-date valuation possible. We provide detailed, professional business valuations that take into account the full picture of your business. Our valuations are designed to be as accurate as possible, reflecting current market conditions and providing you with a solid foundation for whatever business decisions you face. For more insights and advice on business valuations, or to get your business valued, contact Robbins Pellegrino today!
About Robbins Pellegrino: Robbins Pellegrino is a Florida-based business brokerage firm led by Chandler Robbins and Joe Pellegrino, Jr. that is committed to redefining industry standards. We focus on creating meaningful partnerships and ensuring successful business transitions for both buyers and sellers. For more information, visit us at www.robbinspellegrino.com or call (239) 360-6273
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