Business Valuation
Valuation – def. n. The act of determining the value of anything; evaluation; appraisal.
Ref. Webster’s dictionary.
Rules of Thumb – def. 1. A rule based on past experience, guessimate or practice rather than on scientific knowledge or a controlled appraisal process. 2. Crude approach.
Ref. Webster’s dictionary.
Reasons for performing a Business Valuation.
Many business owners hesitate in conducting a business valuation when preparing their business for market primarily because of the expense. They wish only to use the ‘Rule of Thumb’ method to set an asking price then let the market determine the final sales price through the negotiation process. This method usually extends the selling period substantially and generally results in never knowing if the sales price was fair and reasonable and represents the maximum return on investment.
Some of the difficulties working without a business valuation are:
- The buyers ‘guesstimate’ of value is as valid as the sellers’ without a value benchmark to work from.
- There hasn’t been a impartial examination of the hard and soft assets to establish relative value.
- Usually no normalized financial statement has been prepared to determine the owners’ true benefits derived from the business operation.
- Without the ‘true owners’ benefit’ being determined it is impossible to establish an accurate business value or reasonable price range.
- Negotiations generally flounder without an impartial valuation to act as a guide.
Rules of Thumb. The difficulty with anyone relying on this valuation method other than using it as a quick ‘ball park’ answer is too generalized. So when you read that a average business in a particular business sector sells for, say: “10 times its monthly gross revenue”, exactly what business are they referring to since no two businesses are the alike. How old was its’ equipment? What condition was its’ facility? What sort of purchase terms were accepted? 'Rules of Thumb' do not detail the similarities and differences from what you have for sale or looking to purchase therefore it is impossible to know if their published value formula is truely a comparable. For these any many other reasons the 'Rule of Thumb' method is unreliable and most often misleading.
The purchase of selling of a business is far too important to be left to chance. The only sure method of determining the true market value of any business is to have a professional conduct an impartial business valuation which examines all of the contributing factors that would influence its' true market value.
Custom Valuation.
MacInnes & Co. would be pleased to present a quotation to perform a comprehensive business valuation within budget to create a solid platform to develop an exit strategy.