Tuesday, June 24, 2014

How to Make the Best Valuation of Your Firm

Small-business owners are likely to be fielding offers again. So if you've been thinking of cashing in, it may be a good time to do so.

But beware of lowball offers. Some buyers will hope to take advantage of owners’ weariness after the struggle of three years of a weak economy.

Sellers: increase the value of your firm
·         If you anticipate selling your firm, consider some steps that will enhance its value to prospective buyers.

·         Create an identity for the firm that is separate from any one individual.

·         Have a clear focus of activity and clearly defined markets.

·         Achieve an appropriate size to support a particular buyer’s strategy. (Revenues and profits must allow new owners to recoup their investment.)

·         Show consistent profit earnings.

·         Demonstrate consistent cash flow potential for the new owner.

·         Show a reliable amount of repeat work and clients.

How NOT to Value Your Firm
·         Do not value your firm using the following methods:

·         How much the owner needs to comfortably retire. This has nothing to do with your firm.

·         Valuations more than two years old. Just because your design firm was worth $500,000 a few years ago, there’s no guarantee that it’s worth that amount plus inflation now. It may be worth more. Value is subject to current market conditions and past and potential profitability, not cost of living.

·         How much it would cost to replace the firm or build a new one. Replacement value is cost driven; firm value is market driven.

·         An offer from an outside buyer. Do your valuation first, then consider the offer.

·         How profitable your firm should be. Valuation is based on a combination of actual and
potential performance.

·         How profitable you were 10 years ago. This is ancient history.

·         How much another firm sold for. Each seller and buyer is unique.

·         Book value. You’ll vastly undervalue your firm if you count on book value.

·         Rules of thumb. Guidelines like multiplier of book value, earnings multipliers, dollars per

staff, and others can contribute to your valuation. But they don’t tell the whole story of what your firm is worth at this particular time to a particular buyer.

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