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Busting All of the Small Business Valuation Myths

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Small and medium-sized enterprises are currently driving as much as 98% of the economy. The vast majority of SMEs will change hands within ten years, so it’s important for owners to understand what their business is worth. There's a whole industry built on the acquisition of companies at cheap valuations.

It is up to business owners to understand buyers' motives and the process of a small business valuation. There are a number of myths and misconceptions that contribute to not getting what a business is worth.

3 business valuation myths you may have heard before

  1. Buyer Offers Won't Vary Much

The rule of thumb is that too much negotiation is bad and you shouldn't be picky when you need to sell. If you've ever watched the TV show 'Shark Tank' you'll know that valuations can make or break a deal. In that show, it's about gaining investors, but sometimes companies are bought outright.

The moral of the story here is that most counter-valuations by the investors are within a range. In reality, you can secure much better offers for your company if you know the type of buyer.

Venture capitalists want the most return for the least amount of risk.

Strategic buyers want to incorporate your company's operations and success. They will be willing to pay more than some passive financial investment. Calculate your company’s worth and go after buyers within your industry.

  1. Sell During Spikes in Growth

On paper, it sounds like a good idea to get the most value possible by selling when your company is recently doing good. You could tell buyers that your company's projections have gone up, therefore worth more in the future. Nah, that doesn't work on most solid buyers.

Buyers want to see long-term growth and earnings. Sure, a sudden uptick in earnings is nice, but they can't know if it's sustainable. There are some instances where a recent market capitalization could help with your valuation.

For that, you're going to need a business advisor who knows how to make this look financially desirable to buyers.

  1. Wealthy Customers Matter Most

A lot of small businesses get caught up on the need to secure high-profile or very wealthy customers. If these customers make up the lion's share of your revenue, they could strike uncertainty in a valuation. It is much more comforting to an interested buyer to see a broad range of customers and demographics.

This allows for easier future growth and market capture. Potentially losing any of your big customers, for whatever reason, is seen as a huge risk.

Maximizing your small business valuation

There are many more myths like these out there that prevent owners from reaching fair agreements. If you don't know the true value of your company, struggle with financial structuring, or don't utilize the most out of tax deductions, you could be selling yourself short.

Advisory & Consulting Services

You need a business partner who knows about small business valuations, who can provide multiple strategic services all under one roof. Reach out to us today to find out more about how you can present your business on a silver platter for if and when you decide to retire from the business.

We are here to make the complex simple.

September 25, 2018