Five Myths of Business Valuations

SCORE, an informational organization that caters to small businesses, has a great article on its website about the myths of business valuations. The myths it lists are:

Myth 1 – Valuing a private business should only be done when the business is ready to be sold or a lender requires a valuation as part of its due diligence process.

This isn’t true. Effective financial planning requires regular valuations. Especially if a change in ownership is expected. We’ve written about the different occasions, other than at the time of purchase or sale, when a valuation might be necessary here, here, and here. 

Myth 2 – Businesses in my industry always sell for two times annual revenue (the revenue multiple). So why should I pay someone to value my business?

Often, the numbers you see when determining sale prices in your industry are median sale prices. Your business could have a value much different than the median sale price in your industry. 

Myth 3 – A local competitor sold his business for three times revenue six months ago. My business is worth at least this much!

A lot can happen in six months. Economic conditions can shift quickly and you may be selling your business in a much different environment than your competitor did six months ago.

Myth 4 – How much a business is worth depends on what the valuation is used for.

A business’ worth is determined by its fair market value, which, if determined properly, should be the same no matter what the valuation is used for.

Myth 5 – Your business loses money, so it is not worth much.

Sometimes, it may just appear that your business is losing money. When you take a look at discretionary expenses, you will likely find quite a bit of cash generated by your business.

Don’t believe the myths. Get the facts about your business’ worth with a professional business valuation.

You can read the full article on the SCORE website here.

By: Present Value

Tags: business valuation myths, business value, business worth, SCORE
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