Business Valuation… What Does The Value Of A Business Mean?
The first rule of valuation is what is being valued is only worth what a willing buyer is prepared to pay for it. That it easy then? Well no. Where this becomes an issue is that the vendor needs to agree to that valuation for a sale to happen.
The value of a business complicates this formula further still because unlike a product or commodity, a business will either have future potential or be on the way down from its peak. What will tend to happen is that the current business owner thinks that with a little more effort this business could achieve great profits. Contrary to this, the buyer will no doubt feel that they will need to put extra effort in to achieve additional profit and so why should they pay for their future efforts? A valuation that both parties can agree on is when an appreciation of the profitability of the business, together with the value of the assets, strikes a balance that current market conditions dictate.
A good example of this was the value of commercial property prior to 2007. Property was seen as an asset by most of the financial institutions in the World. Providing it could give a return on investment, and it was thought that most commercial property could give a return on investment that was upwards only, then the higher the value, the higher the return. The credit crisis throughout the World from 2008 brought this to an abrupt close. The return on investment could not be guaranteed, property sales ground to a halt, and values fell. A problem we are still feeling today in this sector.
In many smaller businesses the value of the business is linked to the property in which that business operates. A business owner must therefore look at the current market conditions for their business sector if they are to arrive at a true valuation of their business. Look at the facts available. How profitable is the business and am I achieving the maximum out of this business? If the business occupies a property is the building in good condition and if not what will be the cost of repairs? If the repairs were undertaken could the business be more profitable?
If the owner of a business can sell their business without any assistance they have been able to fulfill the first rule of valuation. If a deal is able to be clinched so quickly it probably means the maximum value has not been achieved however. In most cases it is therefore a good idea for the business owner to seek the advice of a business and commercial property specialist. At the very least, choosing a professional specialising in this area will provide the owner with the comfort of knowing that they got the valuation right