Business owners are often on the fence about the merits of ordering a valuation. Understand this: If you don’t know how much your business is truly worth, it can affect your company’s success, your eventual ability to sell, and even your retirement.
Why the hesitancy? After all, few owners would argue the importance of knowing their company’s value.
Generally, it comes down to overconfidence. Business owners often choose to save a buck and appraise their own business rather than turning to the experts. Owners know their business better than anyone else - so why shouldn’t they be the one to determine it’s worth?
You may know your business like the back of your hand, but that doesn’t make you the right person to run a valuation. According to an article from the Washington Post, a typical owner misjudges the value of his or her company by 59 percent. That’s because they estimate their company’s value based on other businesses in the same industry.
However, businesses - and valuations - are far more complex. From growth strategies to personnel structure, every business is unique. It takes an experienced and accredited appraiser to digest all the nitty-gritty details and punch out an accurate valuation.
Moreover, leaving a business valuation up to chance will come back to bite you in the end. Here are three reasons why you should view an accredited valuation as a necessity, not an option:
1. A buyer will conduct one anyway - When it comes time to sell your business, potential buyers will likely conduct a valuation of their own. Realize, however, that a valuation isn’t an exact science. Your buyer has a vested interest in your company’s worth, and it’s possible that subjectivity could lead to a lower valuation than you’d expect.
Soliciting a valuation from an accredited, independent appraiser provides you an unbiased number you can trust. That way, if your buyer makes a less-than-expected offer, a business appraisal provides you a leg to stand on.
2. Your retirement planning can suffer - Business owners often fear retirement for many reasons. One of the biggest is the uncertainty of having enough money to retire the way they’ve dreamed.
Creating a retirement plan starts with knowing how much your company is worth, and consequently, how big your pot of gold will be down the line.
3. Your business might not be as sound as you think - Valuations are primary calculated based on cash flow and risk. While cash flow is fairly straightforward, risk can be a bit more muddy.
For example, some business owners believe their company is chugging along smoothly. Their cash flow is high, their operations are running efficiently, and everything seems hunky-dory.
However, a valuation might reveal that 50 percent of their revenue is coming from one or two primary customers. Lose one of those customers, and cash flow plummets. That’s a precarious position to be in, and one that can severely impact your company’s worth.
Also realize that the future is never certain. Your business can’t ever stop adapting, changing and preparing until it’s death - or that day will come sooner than expected. A valuation can help you form the strategic plan you need for success.
Don’t leave your future and your business up to chance by trying to conduct a valuation on your own. Solicit an accredited appraiser, so you can feel secure in knowing your company’s true value.