Common Business Valuation Mistakes All Owners Should Avoid

Having a business valuation is an important process that all business owners need to complete. As a tool to help estimate the value of your business, this data can be used for the purpose of contract negotiations, loan applications and many additional transactions. Ensure your valuation is accurate for the greatest outcome.

Poor Record Keeping

Business valuation reports are based largely on past data that is found in your record keeping. Given their significance, a problem with your data will directly translate into errors and inaccuracies on your valuation report. Before even attempting to calculate value, it's a good idea to review your records to see if there are any discrepancies.

Highlighting these errors and addressing them quickly will ensure your valuation process is more accurate. It's a good idea to start this step well before you plan to begin the valuation process to ensure you have ample time to perform this task.

Unrealistic Revenue Outlooks

Realistic revenue outlooks are very important. As part of the valuation process, the projected growth rate of your business will be used to help determine a future value of your business. If you aren't fully researching the market, it's very easy to overestimate.

For example, take a growth rate that is based on the idea that there won't be any competition for the next several years. If the company has failed to research the two start-up brands that plan to launch in their area within the next few years, they're asking for trouble. It would be unrealistic to assume that these new companies would have no impact on their own growth. Always be realistic with your outlooks and do your research.

Overlooking Working Capital

Don't make the mistake of overlooking your working capital. Sure, working capital has a lot to do with short-term financial health, but it is equally important to your future health. If your valuation projections include the idea that your business's demand will increase over time, it's a good idea to veer towards the thought that working capital needs will also increase as your business's demands increase.

Not figuring in your working capital is a clear mistake. Working capital is necessary to your business's ability to grow as projected so it should never be overlooked and always deducted from the valuation totals.

To avoid these mishaps and ensure you are afforded a more accurate result, it's ideal to pair with a consulting firm that offers valuation services. In addition to greater accuracy, these professionals can provide you with the data you need in a shorter amount of time than you would be able to produce on your own.