If you are thinking of selling your business now or in the future, getting a valuation is one of the first steps you need to take. If you have never been through the process before, you may be wondering how much a business valuation costs. In short, it depends. However, cost is not the only thing to be thinking about when it comes to planning your business valuation.

Below, we will take a look at several key aspects related to business valuations, including:

• How business valuation is calculated
• The benefits of getting a business valuation
• What you need for a business valuation
• How much a business valuation costs

Related Article: How Do Patents Affect Business Valuation? Here’s What You Need to Know

How Business Value Is Calculated

First, it is important to understand how business value is calculated. In truth, there are a number of methods for calculating business value. Some of these include:

• Fair market value
• Book value
• Discounted cash flow
• Income approach
• Asset-based approach
• SDE multiple method

While each method has its place, most business valuation professionals use the SDE multiple method for privately owned online businesses.

“If you are thinking of selling your business now or in the future, getting a valuation is one of the first steps you need to take.”

SDE multiple method

According to the SDE multiple method, the value of a business is equal to the seller’s discretionary earnings times a number, called the multiple.

Business Value = SDE x Multiple

While it may seem simple on the surface, a lot goes into determining both the multiple and SDE. SDE is similar to income, but it differs in several key ways. It is a figure that accounts for the true money-generating capacity of a business.

To calculate SDE, start with income and add back all allowable expenses. These include:

• Interest
• Taxes
• Depreciation
• Amortization
• Owner’s salary
• Noncash expenses
• Unrelated expenses or income

This is not a complete list. It is extremely important to add back all allowable expenses when calculating SDE during the valuation process. If you fail to do so, you will get an inaccurate business valuation. Any miscalculations will be discovered during the due-diligence process when you do sell your business.

Understanding the multiple

Business value is about much more than SDE. Two businesses could have identical SDE figures but wildly different valuations. There are a number of scenarios that could explain this. The multiple accounts for tangible and intangible factors that impact business value. These factors can generally be categorized into four main groups known as the Four Pillars of Value. They are:

• Growth
• Risk
• Documentation
• Transferability

A business with strong past and current growth is worth more than one that is stagnant or in decline. The more risk a business has, the less valuable it will be. If your business does not have clear documentation, it will be less valuable than other similar businesses that do. Lastly, if your business cannot be transferred to a new owner without harming performance, it will be less valuable than businesses that can.

“Getting a business valuation can help you run a more streamlined and profitable business while it is under your ownership.”

The Benefits of Getting a Business Valuation

Getting a professional business valuation, or business appraisal, brings many benefits. Of course, it is important to get one if you are planning on selling your business anytime soon. Even if you aren’t, getting a business valuation can help you run a more streamlined and profitable business while it is under your ownership.

Below, we explore some of the benefits of getting a business valuation. These include:

• Providing an accurate estimation of business value
• Identifying strengths and weaknesses
• Developing strategies to grow value
• Making your business easier to run
• Revealing the best time to sell
• Getting better deal terms

Provide an accurate estimation of business value

As we have seen, calculating value is not a simple plug-and-play process. There are many objective and subjective factors that go into determining value. As a business owner, you may be tempted to use an online business value calculator to value your business. While these are quick and easy to use, they are often inaccurate.

A quality valuation by a certified business appraiser or valuation analyst provides you with a much more precise and accurate idea of the value of your business. They will be able to evaluate all aspects of your business and give you a much better estimate than even the best online business valuation tools.

If you are selling your business in the near term, a valuation will help you know what price to list it at. If you aren’t, knowing its value can still be useful. It may help you with long-term financial planning. Or, it may be important to know its value when seeking approval on a loan. If you are on the fence about selling, knowing the value could help you make the decision one way or the other.

“A good valuation report by a skilled professional like a business broker can help you identify the strengths and weaknesses of your business.”

Identify strengths and weaknesses

An accurate valuation gives you much more than a simple dollar-value figure. During the valuation process, your valuation professional will thoroughly examine all aspects of your business. They will comb through your financial statements and evaluate your operations.

When they have completed the valuation, they will provide a valuation report. In addition to the value estimate, it should contain a clear explanation of how the value was calculated. Understanding the “why” behind the number is extremely important.

A good report by a quality professional like a business broker can help you identify the strengths and weaknesses of your business. If you plan to hold on to your business, having an idea of its strengths and weaknesses is extremely important.

Develop strategies to grow value

A good valuation will help you understand what drives business value and how your company stacks up. Armed with this knowledge, you can implement changes to grow the value of your business. In this way, getting a valuation is crucial for developing a useful business strategy.

For example, the valuation may reveal that your documentation doesn’t meet industry standards. If you aren’t planning on selling your business immediately, you could take steps to improve your documentation. By doing so you would raise the value of your business for when you do decide to sell it.

“A good valuation will help you understand what drives business value and how your company stacks up.”

Or, your valuation could reveal ways in which your marketing and sales approach falls short. By identifying opportunities, you could develop new strategies to improve marketing and sales and grow your business income. This could include launching new products or adding new marketing channels. In addition to raising profitability while you own the company, this would also set you up for a bigger payday when the time comes to sell it.

Make your business easier to run

Raising company value is not the only way to improve your business while you still own it. A quality business valuation could also help you identify opportunities for you to streamline operations. This can make your business easier and less demanding to run while it is still under your ownership.

One example of this would be hiring individuals and teams to handle certain day-to-day operations. This could include a marketing team, a personal assistant, product developers, and more. As your business becomes more automated, your required time input diminishes. This frees you up to focus on big-picture tasks or pursue other opportunities.

Reveal the best time to sell

Getting an accurate business valuation can also help you determine the right time to sell your company. If the valuation reveals that your business is fairly optimized and in great shape, perhaps now would be a good time to sell it. Or, perhaps you learn that there are several things to get in order before putting it on the market.

Regardless of your situation, getting a business valuation can help to ensure that you sell at a time that gives you the best shot of getting the best deal terms and maximizing your profit.

“Getting an accurate business valuation can also help you determine the right time to sell your company.”

Get better deal terms

The success of your exit is not solely determined by how much you sell your business for. The terms of the deal have a large impact on your post-exit life. By optimizing your business prior to selling it, you increase your chances of achieving more-favorable deal terms.

What You Need for a Business Valuation

All business Advisors, or business brokers, operate a little differently when it comes to conducting a valuation. However, there are several things that they will likely ask for during the valuation process. These include:

• Profit and loss statement
• Balance sheet
• Business documentation

It is important to know that your Advisor will ask for financial statements using accrual accounting. Accrual accounting reveals trends and seasonality to a greater degree than other accounting methods. This is extremely important for determining an accurate valuation. If you don’t have accrual accounting records available, this will be one of the first things that must be addressed before getting a valuation.

Be prepared for your Advisor to ask for other business documentation as well. This could include your standard operating procedures, supplier and vendor relationships, communications, and more.

“If you don’t have accrual accounting records available, this will be one of the first things that must be addressed before getting a valuation.”

Throughout the process, make sure you are available to answer any questions your Advisor has. They will want to speak with you at length to understand the narrative of your business and its operations. They will want to know if there is anything that makes it unique or more valuable. Remember, business value is about much more than numbers.

How Much a Business Valuation Costs

At Quiet Light, our Advisors do not charge for a business appraisal. It is a part of the entire exit process. We cannot speak to the fee schedules of other qualified business appraisers, however. Some may charge a valuation fee while others may not, depending on their practice.

If you are interested in learning more about getting a free business valuation, reach out to our team to speak with one of our Advisors today.