3. Needs-Based: Some owners reverse engineer the value of their business based on the amount they want/need.
This is a bit like the tail wagging the dog. A knowledgeable buyer certainly won’t over-pay for a business in order to fund your retirement.
4. Unproven Success: Early stage or high -growth companies may not have proven their business model yet.
Remember, in most cases small businesses are bought based on historical performance, not projections. To profit from investments made to grow the business, you should count on three years of sustained performance at the elevated levels.
At the end of the day your business is only worth what a buyer is willing to pay. Absent that, a formal valuation not only helps to set expectations, but also educates the owner on the variables which impact value.
While getting a valuation which is significantly less than one had hoped can be very discouraging. However, recognizing the factors driving value can also be empowering. And, positively influencing those factors can lead to a higher valuation down the road.
Kelly Deis is president of Soundpoint Consulting, based right here in Kitsap County. She earned an MBA at the Wharton School, and offers services as a Certified Valuation Analyst and Certified Exit Planning Analyst. She also helps clients develop a differentiating strategy.