It’s difficult to put a price tag on your business because how can you put monetary values on hard work, dedication and passion? But the fact remains that sooner or later, you will have to quantify the value of your business to stakeholders or buyers. Once you’ve come up with the decision to do this, then the next logical challenge would be how. How would you communicate the value of your business in terms of perceived results, greater visibility, increase in getting more funding, and/or attract more people to the business?
These are many questions but all require answers.
First, let us try to dissect why your stakeholders don’t always understand the value of your firm. The answer is because most often, business owners talk in terms of features. Presenting product or service features is good but how do they impact stakeholders? Also, what do those features mean for a potential investor or buyer?
Instead, communicate exactly what’s in it for your stakeholders by discussing benefits. Benefits are why people would care for your brand, while features talk about systems or processes and what they do. Therefore, make it a point to sell with benefits, and not features. Top those with an appeal to the logical part of the brain using facts, data and research.
How do you determine the value of your business?
Of course, when presenting benefits, you also need to include the value of your business. If you don’t know this, there are three tips that you can do.
• The Rule of Thumb
This system of valuation determined the value of the company based on its ability to secure profit within a specific period of time. You can start by determining your company’s net profit before the deduction of taxes and interest. After which, you multiply that amount by a multiplier, which is based on the number of years for the new owner to experience an ROI.
Generally, you use 5 as the multiplier if you own a business with several assets. Otherwise, 3 as a multiplier should be fine.
• Industry Average
Using this method, you will get an estimate of your business’ total worth based on the sales price of similar business for the six to 12 months. This is not a very precise method to determine the value of your business because you based it on other businesses.
Remember, no two businesses are exactly alike because there are elements that make one more valuable than the other. You have to factor in size, location, reputation, and market share, among others. Therefore, it is recommended to use the Industry Average to come up with a range of values that you can discuss as buyer and seller.
Yet another commonly used valuation method takes advantage of the value of your business’ assets in order to determine the dollar value of your firm. The asset-based method is not recommended for small business, though. Rather, it is highly useful for retailers, manufacturers, and other companies that own large quantities of fixed assets.
Your success at determining the value of your business using this method depends largely on your ability to accurately identify the Fair Market Value of the assets. The FMV is basically the money that would cost you to replace the equipment at current market prices while the inventory at wholesale prices. That’s quite a big for you to accomplish on your own so it’s best to employ the services of a professional tax consultant or business appraiser.
After which, an owner benefit value is added to the FMV in order to determine the value of your business.
But what if you have a small business, is valuation still needed?
Regardless of how small your business is, it’s always useful to have a realistic idea on how much it’s actually worth. For most small business owners, they treat their business as nest eggs. In fact, research shows that many small business owners don’t even diversify investments because they plan to retire on how much they can sell their business for.
But valuation is not only needed in preparation for a sale. You also need valuation for tax purposes, or in some cases, to satisfy the requirements of Employee Stock Ownership Plans.