Valuing Your Business Services Company: Why It’s Important to Get it Right
Service business valuation when it’s time to sell your business services company in California, the very first step is to value your business. This is true no matter what business you are preparing to sell. It makes sense of course; you can’t sell something until you know what it is actually worth.
But why, exactly is it so important to get it right and how do you go about valuing your business? Here are some keys to determining what your business services company is worth, and why each step matters.
The Owner Dilemma
Like any baby boomer business owner, the owner of a business services company will typically do one of two things when they are looking at the value of their business.
- Underestimate Business Value: Many business owners don’t really know what goes with their business when they sell, fail to understand some of the intrinsic value of their company, and sometimes are even just hesitant to assign a value to their business at all. This means they come up with a low number.
- Overestimating Business Value: Often when owners guess at the value of their business, they overestimate it because of all the years and effort they have put into it. Of course, every business owner wants to be paid for that time and their expertise, but that doesn’t reflect what the business is really worth to someone else.
This is why it is important to go through the business valuation process. There are a couple of ways we do this at Rogerson Business Services.
The Business Valuation
If you just want to get a general idea of what your business is worth as you are developing your exit plan, we have a free tool that walks you through the business valuation process in seven steps using a spreadsheet we offer you for free. While not a certified business valuation you can use with a buyer or a lender, it can help you be prepared for the more formal process, and it can give you an idea of what your company is actually worth.
But when you are ready to sell, you will need an official business valuation. You’ll want to have this done by a Certified Business Broker. What do you need to complete that process?
- Three years of tax returns, both personal and business.
- Profit and loss statements from the three previous years.
- The Value of Business Assets and Equipment
- Other related financial documents.
You’ll need to gather these documents and make sure they are accurate and up to date in order to accurately determine the value of your business.
Once your business broker has these items and other things they may ask you to provide, they will be able to perform a formal business valuation, one you can use in setting the price for your business and even provide to a lender if your potential buyer needs financing.
Cleaning House and Your Business Valuation
Your business broker can also help you with recasting your books. You’ll add things like owner salary and benefits and certain other items you may have deducted back into the value of your business. Since you often arrange your accounting to show the least tax liability, you need to instead show your buyer the true earning potential of your business.
The key at this point is to be transparent. Anything like potential legal actions, financial liabilities, and debt will all become evident during the due diligence process. If you have left anything out of the information you’ve given to your business broker, this can even be a deal killer.
Why is it Important to Get the Business Valuation Right?
Your business valuation is the foundation for every other aspect of the sale of your business. It helps you and any potential buyer determine what your business is actually worth. But it goes further than that.
Remember we mentioned that the other purpose for a certified business valuation is so that if your buyer needs financing, they can provide this documentation to a lender. The lender will examine this valuation thoroughly since they are counting on it to help secure any business loan.
Errors in your business valuation can harm the ability of your buyer to get the financing they need to close the deal. This can result in you being unable to sell your business for the right price to the right buyer at the right time.
A business valuation is only as good as the data that goes into it, so be sure to be open and share everything with your business broker. Ensure all that information is correct and up to date to make sure you don’t run into issues later on.
If you’re looking to sell and value a business services company in California, you’ll need to start with a service business valuation. Contact us today at Rogerson Business Services. We can help you get the process started. We’d love to be your California Certified Business Broker, and assist in selling your business to the right buyer for the right price at the right time.