Calculating your business value takes a keen and objective eye.
The process for determining the worth of a business is an act that is equal parts skill and art, one that a good broker will be fluent in.
As a tool used to determine the sale value of a business, to establish partnerships, or for tax purposes, an accurate valuation takes a qualified professional to analyze the company’s financial statements.
A valuation not only considers financial information, but comparable transactions, industry ratios, and other measurable information.
But there are some not-so-measurable insights that are better left to an outside entity.
Nadir Jiddou, The Michigan Business Broker, says that for multiple reasons, business owners over-value their company.
As a business owner himself, Nadir empathizes with how business owners may think they know what their businesses are worth, only to find out that they are valued at much less.
Nevertheless, the value of knowing can mean more from a sale in the end, as well as a more accurate picture for the buyer.
The Importance of Getting a Valuation
Valuations are performed for many reasons, including but certainly not limited to selling or acquiring a business.
Valuations are important any time a business’s assets need to be determined for legal filings (such as in cases of death, disability, or divorce).
Other reasons may include:
- To raise strategic capital or obtaining a Small Business Association (SBA) loan
- Implementing an Employee Stock Ownership Plan (ESOP)
- To reconcile perceived opinions on value
Most companies will gain a higher valuation when they work with a broker who can bring strategic insights to the process.
A broker is particularly valuable in the later stages of a sale, which include negotiations, due diligence, and finalizing the deal.
Consider getting this information earlier for an accurate analysis of a company’s value before a sale. You may find many things that haven’t been considered.
Nadir Weighs in on Why Valuation May Be Off
Nadir says surprises happen, and seemingly lucrative businesses are surprised to find that the valuation doesn’t match their desired price tag.
Some of these reasons can include:
- Their debt service coverage ratio (DSCR) – a thorough measure of a company’s ability to repay its loans – is inaccurate
- Family employees may be scewing the numbers
- Overlooked maintenance issues may affect curb appeal
As an outsider looking into your business, a broker can formulate a clearer picture and provide a better valuation.
“Every seller thinks their business is worth more,” Nadir says, “but new buyers will see things differently.”
A hole in the wall may go unnoticed to current operators of a business, for example, but buyers will see it as a sign or disorganization.
What is Valuable to Michigan Business Buyers?
How presentable a business looks, curb appeal, and good housekeeping are just as important as its financials, Nadir advises.
A broker’s ability to see these hidden valuation hurdles can help boost a business’ worth.
What a buyer wants to see, what makes an entity a top value goes beyond assets and equipment.
They are also looking for:
- How well your business can run without you
- Good housekeeping – that all your ducks are in a row, and all inventory is in the right place
- That you draw a good customer base
- Consistency – that people coming day after day, year after year
- Trends vs. the current state of the business – A business may be worth $2 million this year, which is attractive, but if it made $3 million last year it is trending in the wrong direction
At the end of the day, buyers are not going to buy unless it is making money, Nadir says.
Success should be present not only on paper but appealing visually, organizationally, and as an entity trending upward.
Michigan Business Broker Nadir Jiddou is Here to Help
Having bought and sold businesses for more than 18 years in Michigan, Nadir Jiddou utilizes his contacts and experience to help his clients achieve their objectives quickly.
Call us at (248) 220-3274 or look at the business listings we currently have on hand to see what might be a fit for you.