By: Fatema Fatakdawala
The average business owner miscalculates the value of his/her business 59% of the time according to a Maryland based valuation firm, Spardata. Historically, businesses are evaluated by comparison to other businesses in the same industry. However, in truth, this technique is faulty since every business is unique and its value must be derived individually.
The strategy to proper business valuation involves the business owner’s long term goals; but more importantly, it needs to be tailored to the business model of the firm. Valuation is very closely linked to the owner’s personal retirement plans and in this sense, an incorrect valuation (which occurs 41% of the time) can cost the owner unforeseen lifestyle changes.
When done appropriately, valuation is usually performed on a regular basis to account for both the changing market conditions as well as the growth of the business over time. Business owners should hire individuals or companies with the right valuation certification such as the certified valuation analyst (CVA) or the accredited senior appraiser (ASA) among others. According to a study done in 2011 by MassMutual’s Capitol Financial Partners, 6 in 10 business owners felt that they already knew what their business value was; however, one quarter of those people had performed the valuation on their own.
Over the past 5 years, the business valuation software industry is expected to grow 1.8% annually to $70.4 million as shown by an IBIS World report. The products available today simplify the valuation process, allowing users to create, customize and format reports. Moreover, there are stringent regulations in place to standardize financial reporting procedures to help firms perform comparisons for M&A’s as well as for pricing shares and litigation support.
Overall, understanding what your business is really worth can reduce conflict between two parties during mergers and acquisitions, avoid potential tax issues and provide a framework for business owners to plan their retirement more accurately.
Fatema joins the RIC team as the Communications Officer responsible for marketing, social media, event and web management. She is a graduate student pursuing her final year in the Master of Biotechnology program at the University of Toronto Mississauga.