What’s a business worth? What could the owners get for it if they wanted to sell it? What’s a reasonable estimate to use for attracting investors?
The buzzword for this is valuation. If you own a business or want to start a business, then you care about valuation and how it works. Even if you don’t now, you will later.
- Businesses that seek investment need to anticipate valuation as part of the exit strategy, which is how the investors make money. You get investment now, but only if investors believe they’ll make money when the business sells later.
- For estate planning, you need to estimate valuation if you deal in shares of a business for your wife, partner, significant other or children. Tax code defines how much you can give in any given year, and that depends on valuation.
- Lots of people who never thought of exit during years of running a business start thinking of selling as they get into their 60s and 70s. And that means selling the business.
- Valuation is obviously critical for buying or selling a business.
- Not to bring up unpleasant angles, but valuation figures in wills and divorce settlements, too.
All of which brings up BizEquity.com, introduced last year as “the Zillow.com of small business valuation.” Take a look at it. You can search your ZIP code for estimated valuations by type of business. You can search for your specific business by name. Most interesting, and a new feature, you can sign up and run through a valuation based on your business numbers.
I did a test run over the weekend, by inventing hypothetical numbers for an internet company. I had it started just three years ago, growing sales to $350,000. It had little or no profits, a bit of debt and a lot of dependence on the owner (the site’s auto wizard asked me the right questions). The estimate ended up at about $275,000, with interesting variations above and below that depending on how I set several sliders. You probably can’t read the details in the shrunken illustration below, but the sliders are asking how favorable the location, the level of competition, and how you foresee the future financial performance.
With the way the sliders work, you can see instantly how valuation would change with different settings
Obviously, these are just estimates. As with estimates of house values, before you list your house, these estimates give you some idea but are far from exact. They’re based on some standard formulas that estimate valuation based on factors such as sales, profits, assets, liabilities and so forth. Don’t even dream of using this for a tax-related valuation, which requires a certified valuation professional; but it’s still a useful first look.