What to Look For in a Business Valuation Professional

Getting your company valued by a business valuation professional is a crucial step if you’re thinking about selling your business. An expert valuation goes beyond telling you how much you can expect to sell your business for. Done well, it can help you create a strategy and achieve a more profitable and successful exit.

In this article, we discuss:

• What is a business valuation professional?
• Which valuation method should you use to value your business?
• Why you should consider getting your business valued
• Key traits to look for in a business valuation expert
• How much does it cost to get a business valued?

Related Article: How Business Valuations Work and Why They’re Important

What Is a Business Valuation Professional?

How much is your company worth? If you don’t know the answer to this question off the top of your head, do you know how you could calculate it accurately?

Many entrepreneurs don’t have an accurate idea of what their business is worth. Furthermore, many entrepreneurs don’t understand how to accurately assess their company’s value.

The operative word here is “accurately”— business valuations are not always straightforward. Most business owners could guess the value of a given company. But it takes an expert, or valuation specialist, to make an accurate value estimate.

Other names for valuation specialists include:

• Business brokers
• Certified business valuation experts
• Business appraisers
• Certified valuation analysts
• Business valuation experts
• Accredited valuation analysts
• Business valuation specialists
• Certified business appraisers
• Business Advisors

Certified public accountants, or CPAs, sometimes specialize as valuation experts. One does not need to be a CPA, but, to be an experienced and skilled business appraiser.

At Quiet Light, we refer to our experts as business Advisors.

Title or valuation credentials aside, most experts have some type of formal training. Also, they likely have extensive experience valuing businesses. Some may value many different types of businesses. Others may offer valuation services for a specific type of business. For example, online businesses, SaaS companies, Amazon FBA companies, and more.

Choosing the right Advisor is crucial to achieving an accurate and useful valuation. In addition, it is also crucial to choose an Advisor who is an expert at the method of valuation that is appropriate for your specific business.

“Many entrepreneurs don’t have an accurate idea of what their business is worth.”

Which Valuation Method Should You Use to Value Your Business?

If you have looked into valuing your company, you have likely realized there are many different methods for calculating value. Given the different types of business valuations, which is right for you?

Understanding the available valuation methods

Common methods for calculating business value include:

• Market capitalization valuation method
• Book value
• Times-revenue valuation method
• Market value method
• Discounted cash flows
• Liquidation method
• SDE multiple method

We won’t go into each valuation method in depth in this article. Each method may be appropriate for a specific type of business or situation. However, most small private online business owners prefer the SDE multiple method.

SDE multiple method

According to the SDE multiple method, the value of a business is equal to the seller’s discretionary earnings, or SDE, times the multiple. In other words:

Business value = SDE x the multiple

This definition seems simple, but it’s very important for an accurate valuation.

“Most small private online business owners prefer the SDE multiple method.”

What is SDE?

The seller’s discretionary earnings are the total benefit, or earnings, that the company provides to the owner. It is often called the “owner’s benefit”. SDE is similar to income, but it is not the same thing. SDE is the income available to the owner of the business before taking into account certain discretionary expenses. These include:

• Taxes
• Interest
• Owner’s salary
• One-time expenses
• Unrelated income or costs

By adding back these expenses, SDE does an excellent job of capturing the true money-generating capacity of a business. As such, it is a more useful figure than income or revenue for comparing two or more businesses to each other.

The multiple

The multiple is a number that serves to capture the tangible and intangible aspects that drive the value of your business and the market in which it operates. As you can imagine, two businesses with identical SDE figures can have dramatically different values. This difference is captured by the multiple.

These drivers of company value can be broken down into four categories known as the Four Pillars of Value. They include:

• Growth
• Risk
• Documentation
• Transferability

When getting a private business valuation, your valuation specialist will look at how your business stacks up on each of these aspects.

Growth

Most buyers are looking for businesses that will allow them to achieve a healthy return on their investment. Strong past and current growth trends signal that a business is likely to continue to grow into the future. For that reason, strong historic growth will serve to increase the value of a business.

In addition to past and current growth trends, buyers will look to see if there are any clear-cut ways that are available to drive growth moving into the future. The external market trends also have an impact on the prospects for future growth. If your business operates in an expanding market, it is much more likely to continue to grow compared to one that operates in a declining market.

“Strong past and current growth trends signal that a business is likely to continue to grow into the future.”

Risk

As an entrepreneur, you are no doubt well aware that all business ventures entail some risk. However, the more risk a business has, the less valuable it will be, all other things being equal.

Risk comes from any part of the business’s success that relies on a single point of failure. For example, if your company has only one successful product or marketing channel, the business would suffer immensely if the performance of either were to suddenly decline.

Documentation

Maintaining clear documentation isn’t only for tax purposes and keeping the Internal Revenue Service happy. Serious potential buyers will also be interested in how well you maintain your business documentation. If you fail to maintain accurate financial reporting and accounting records, standard operating procedures, supplier relationship documents, and other key documentation, the value of your business will suffer.

Transferability

The easier it is to successfully transfer your business to a new owner without negatively impacting its performance, the more valuable it will be. If you run a company that relies heavily on your image or personality for its success, a new owner may find it hard to take over ownership. Reducing barriers to successfully transferring your business is key to creating a profitable exit.

Why You Should Consider Getting Your Business Valued

Regardless of whether or not you are planning to sell your business now or in the future, there are many reasons why getting a professional valuation by a valuation specialist can be helpful. A professional valuation can help you:

• Learn the value of your business
• Understand what drives the value of your business
• Optimize your business and engage in strategic planning
• Achieve a higher sales price and better deal terms when you sell your business

“While you can use online business valuation tools to assess company value, hiring someone who is qualified to perform business valuations is the most accurate valuation method.”

Learn the value of your business

Perhaps the most obvious benefit of getting a valuation is that it provides you with an accurate assessment of the dollar figure of how much your business is worth. This can help you plan your finances accordingly and allow you to make more-informed decisions about when or if you want to sell your company.

While you can use online business valuation tools to assess company value, hiring someone who is qualified to perform business valuations is the most accurate valuation method. In addition, the right business valuation expert will provide you with a business valuation report that goes beyond simply assessing the dollar value of your company.

Understand what drives the value of your business

A good valuation report should spell out exactly why your business is worth what it is. This will allow you to understand the factors that are driving the value of your business.

For starters, this includes stating your SDE figures and how those figures are calculated. This may seem simple on the surface. However, it often takes an expert to know which discretionary expenses are appropriate to “add back” to the income in order to arrive at SDE. Failing to add back appropriate discretionary expenses undervalues your business and leaves easy money on the table.

In addition, your valuation report should state your valuation multiple. At the same time, it should discuss the underlying factors that determine your multiple. Has your business been exhibiting strong growth? Are there areas for potential future growth? What is the state of your documentation? How risky is your business compared to other similar businesses? Is your business easily transferable? Your business valuation expert will use their specialized expertise to shed light on all of these factors.

In some ways, understanding the underlying factors that drive the value of your business is more important than knowing exactly what your business is worth. By taking a deeper dive into the reasons behind your valuation, you can gain a better idea of how to improve your business prior to selling.

Optimize your business and engage in strategic planning

The best time to get a valuation is long before you decide it is time to sell. It is recommended to leave 12–24 months for exit-strategy planning before actually selling your business. Getting a valuation is often the first step in this process.

Your business valuation expert uses their substantial knowledge to gain an understanding of the strengths and weaknesses of your business. You can then use this knowledge to engage in strategic planning in order to optimize your business. Again, return to your SDE figure, as well as the Four Pillars of Value (growth, risk, documentation, and transferability) when creating your plan.

If your valuation analysis reveals that your growth has been flat or declining, create a strategy to drive growth. This may include launching new products or initiating new marketing channels. Likewise, your valuation should discuss the ways in which your business exhibits risk. Depending on your risk profile, it may be necessary to implement changes to mitigate these risks.

You may also need to create changes to improve your documentation practices. This could include cleaning up your financial reporting, creating clear standard operating procedures, documenting your supplier relationships, and more.

If your valuation reveals that your business has barriers to transferability, take the necessary time to address these barriers. This could include removing your image or likeness from your operations. In addition, building out teams and automating business processes makes it much easier for a buyer to run the company once they take over ownership. 

These changes take time and energy. For that reason, it is important to get your business valuation long before you plan to sell. This will allow you to have plenty of time to create a cohesive strategy and implement all necessary improvements.

Achieve a higher sales price and better deal terms when you sell your business

Getting a professional valuation and engaging in business planning prior to selling your business allows you to create a more attractive company for prospective buyers. This helps you to attract more interested buyers, driving up the competition.

Ultimately, this helps you to achieve a more profitable sale and better deal terms.

“Getting a professional valuation and engaging in business planning prior to selling your business allows you to create a more attractive company for prospective buyers.”

Key Traits to Look For in a Business Valuation Expert

While there are many professionals qualified to perform business valuations, not all business valuation experts will be right for your specific business and goals. Finding the right business valuation expert is crucial to creating an appropriate valuation and a cohesive exit strategy.

Pick a business valuation expert with the right experience

First, it is important to choose a business valuation expert who has the right experience for your specific type of business. If you own a private business, for instance, it doesn’t make sense to hire someone who primarily focuses on valuing publicly traded companies.

You can really drill down expertise based on the type of business you own. For example, if you are selling a B2B SaaS company, it may make sense to find someone with extensive experience appraising and selling B2B SaaS companies. Their specialized expertise and knowledge will help to ensure accuracy and thoroughness. Lastly, look at their valuation techniques to ensure they match your needs.

Consider all the services they provide

It is also important to consider all of the services that any prospective valuation expert provides. If you are selling your business, it often makes sense to choose someone who can help you navigate the entire exit process.

Business brokers have extensive experience selling businesses in addition to their valuation expertise. They can help you with all aspects of your business sale, including:

• Creating a clear valuation
• Helping you build an optimization strategy
• Creating your business listing
• Negotiating with potential buyers
• Evaluating offers
• Finalizing paperwork including the letter of intent, asset allocation agreements, and buy-sell agreements
• Closing the deal

For this reason, many entrepreneurs choose to hire a business broker or business Advisor when looking for valuation services.

“If you are selling your business, it often makes sense to choose someone who can help you navigate the entire exit process.”

Consider their motivations

Not all business appraisers will have your best interests in mind. If you feel that a broker is pushing you to sell your business quickly or for less than it is really worth, they may be looking for a quick payday at your expense.

The right Advisor will take time to get to know you and learn about your goals. They will keep your interests at heart and help you navigate the valuation and exit process in a way that helps you reach your objectives. At the same time, they should be able to respectfully offer dissenting opinions when necessary.

“If you feel that a broker is pushing you to sell your business quickly or for less than it is really worth, they may be looking for a quick payday at your expense.”

Ensure they set realistic expectations

Finding an Advisor who encourages you and helps you strive for your objectives is important. At the same time, your Advisor should be able to set realistic expectations throughout the valuation and exit process. Though optimism is good, realism is also necessary for achieving a profitable and successful exit.

If your Advisor is constantly saying “yes” to all your ideas without hesitation, it could mean that they aren’t setting realistic expectations (unless all of your ideas are good ones). While no one likes hearing “no”, sometimes it is the most helpful response an ally can provide.

Make sure you have a good rapport

Lastly, choose an Advisor with whom you have a good rapport. Take time to build the relationship and establish trust. If you are working with them throughout the exit process, you will likely encounter many highs and lows. By choosing to work with someone whom you trust and get along with, you will make the exit journey a much easier experience.

Don’t rush when choosing a valuation expert. Ask them questions to get to know them and understand their motivations. Learn about the services they provide and see that they set realistic expectations. Ensure they have the valuation experience that you need, and establish a good rapport. By doing all of these things you increase your chances of receiving an accurate valuation and achieving a more successful exit.

How Much Does It Cost to Get a Business Valued?

As with all things, costs vary when it comes to getting a business valuation. Shop around and compare prices. Keep in mind, however, that the least expensive option may not provide the most value for you in the long run.

If you are hiring an Advisor to complete your business valuation as well as help you navigate the exit process, the cost of the valuation service is often lumped into their overall fee. For the most part, this fee is calculated as a small percentage of the proceeds that you receive from the sale of your business.

Most entrepreneurs don’t want to incur additional costs during the exit process. However, your Advisor should be able to help you achieve a higher sales price and better deal terms, which will more than make up for their fee. In addition, their assistance can help make a stressful and challenging endeavor much more manageable. For most business owners, hiring a qualified business Advisor is well worth the investment.