Business owners invest a great deal of time, effort, and money into their business. As a result of that investment, many owners overestimate the true market value of the business. This can lead to disappointment when the owner has the business evaluated by a Certified Business Intermediary or if they try to sell the business independently. Here are 4 reasons owners overestimate the value of their business and how you can avoid the same fate.
While goodwill does add value to a business, it is sometimes difficult to objectively quantify. Goodwill on its own does not add value but factors of goodwill that reliably contribute to cash flow do.
Tip: In order to truly assess if goodwill improves the market value of your business, it is important to assess things like
- Marketing effectiveness and demonstrated return on investment,
- Customer satisfaction, and
- Sales performance.
By evaluating these aspects, a business owner can more accurately translate goodwill into a monetary value.
A common misunderstanding is that the value of assets directly and dollar for dollar increases the value of a business. Assets can enhance the value but, in many instances, can also take away value. For example, assets that have a poor return on investment, require significant costs for repair and maintenance, or that do not contribute to the business operations and cash flow will not add significant value, even if they were expensive to purchase.
Tip: To assess if assets are helping the value of the business, take a look at how they contribute to cash flow. If assets are under-used, there is an opportunity to liquidate them or restructure a portion of the business so the asset investment is enhancing value.
Niched and specialized businesses can be highly successful and many owners think the absence of competitors adds value. Most businesses, regardless of how highly specialized they are, do have some competition and it is rare to find that one has an unwavering monopoly on the market. Similar businesses can be launched at any time that could become a major competitor.
Tip: Instead of relying on the perception of niche dominance, regularly conduct a competitive analysis of your market to identify areas of weakness, opportunities for improvement, and to further hone your unique selling proposition.
Most businesses have potential but you can’t put a price on something that has not yet come to fruition. A new owner should not be expected to assume financial responsibility for ideas or plans that are not backed by credible projections created using a realistic model and assumptions.
Tip: If you want to increase the value of your business, execute strategies that translate that potential into cash flow.
One of the best ways an owner can prepare to sell their business or increase profits is to have an accurate understanding of the true value of the business. This can be extremely difficult for owners to do as it requires an objective approach and a specialized skill set. If you are ready to uncover the market value of your business so that you can help it grow, contact Acuity Business Group to arrange an independent market evaluation.