Three Metrics to Consider Now for an Accurate Business Valuation

Posted by Rock LaManna

Getting an accurate valuation actually starts with you

You only get out of a business valuation what you put into it. If you want an accurate appraisal, be prepared to provide some highly detailed information about your company. Among it, three pieces of information are particularly crucial.

As with so many other elements of business, the key to providing this information is planning ahead. Years ahead. To understand why, I turned to Darren Mize, an Accredited Senior Appraiser with GCF Valuation, Inc.

According to Darren, many owners fail to understand the complexity of determining their company’s value. It’s why most owners fail miserably when attempting to appraise their own company (they then wonder why selling is such a struggle).

Darren explained that a company’s value is primarily determined by cash flow and risk. In order to accurately assess these factors, appraisers need as much information about a company’s financial and organizational history as possible - starting with these three pieces of information.

Three Pieces of Information Needed for an Accurate Valuation

Most owners don’t even consider ordering a business valuation until they’re ready to sell. They’re so engulfed in managing the company that it’s difficult to look beyond the immediate future, especially in the early stages of growth.

Take Darren’s advice: Start early - collect and file the following information now. It’ll save you a massive headache down the road when you’re actually thinking of selling, and could shave valuable time off completing the valuation process.

1. Three years of financial statements - While financial statements often come in the form of Progress and Loss Reports, they are acceptable in any form. Also note that the three years includes the current year.

2. Adjustments to your income statement - These include any non-business or non-operating expenses that are paid on your (the owner’s) behalf, such as benefits, perks and travel funds.

3. A detailed business summary - Finally, an appraiser will need details that provide a comprehensive overview of your business. These are especially important for determining your company’s level of overall risk, and include the following:

   * Description of your products and services
   * Markets you serve
   * Suppliers you rely upon
   * Description of your staff
   * Number of management positions
   * List of key employees
   * Your company’s hard assets
   * Specific responsibilities and duties of owner(s)
   * Whether or not any family members are staff employees
   * Specific plans for growth and expansion
   * Condition of the company's facilities and assets
   * Process of marketing/acquiring new business
   * Reliance upon specific companies for annual revenue

Though a business valuation may end with an appraiser, it starts with you. Begin planning, organizing and collecting the necessary information before you ever consider selling. Doing so will streamline the valuation process and ensure an accurate appraisal.

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Topics: Business Valuation