I’ve met many business owners who have an inflated view of what their business is worth and it is not until they actually try selling their business that they have an incredibly rude awakening!
Using business valuation software is fine but you must put in the right data to get the benefit of a valid valuation for your business.
You may have heard the term ‘Garbage in, Garbage out’ when referring to software programmes and this is obviously true when dealing with the whole subject of business valuations.
Most businesses are sold on what’s called a multiple of sustainable profits so this means you need to work out two things:
- The Sustainable profits AND
- The multiple of earnings
The single biggest issue for small business owners when trying to value their business is what to put in for the cost of the business owner.
So let me ask you this:
Do you take a wage which is included in the costs of your business or do you simply take a drawing from the profits?
If you are taking a drawing from the profits, presumably for tax reasons, then the costs of the business owner are ZERO and you will have difficulty finding someone to do the work of the business owner for nothing. In calculating the sustainable profits you must include the costs of the business owner.
When we’re doing this we make our best attempt at what a market cost would be for that position. We ask ourselves the question: ‘What would it cost to hire someone to do the work of the business owner?’ Often this is more than the business owner is taking from the business!
Calculating the sustainable profits is a key ingredient in establishing the value of a business and buyers will be highly focused on getting this correct. This is probably the hardest component to complete when before using business valuation software.
The second part of the equation is the multiple of earnings and this is a factor which is supposed to measure the growth prospects for this business. If a business is growing fast then the multiple is higher than if it is stable. If you want to know more about this then go to www.bizexchange.com.au where you can find the multiples across various different sizes and types of businesses.
What’s your story on business valuations? What positive or negative experiences have you had?
