Many business owners seem to overlook the true meaning of “valuing your company” ; they seem to think it only relates to the money it makes. This couldn’t be further from the truth!
With anything in life, valuing a company has many factors involved that need to be considered when trying to find out how to accurately value a business.
We will discuss some of these factors so you can better understand and prepare yourself for what to look for in a business valuation company, like us!
Valuing a company based on its earnings
Not knowing what your business is worth is the first mistake made. With this approach the problem is that you are neglecting cash and non-operating assets, such as the value of real estate or intellectual property that is owned by the company itself.
To avoid this mistake, we suggest you compare other companies in your industry to see what their average ratio of earnings-to-assets are. If you come to see your company has a lower-than-average ratio, then this will suggest you're not as profitable in the industry as others, you will need to ensure this is not due to accounting errors from your side.
On the other hand, if you have a higher-than-average rating then you will also need to investigate why this could be. It can all come down to accounting errors and you don’t want it to cause more problems down the line for your company.
Forgetting to account for market fluctuations
The market is always changing, and fluctuations are a common mistake that business owners forget to remember. To avoid forgetting to account for the market changes when valuing your company, try to always factor in your capital.
The cost of equity is a measure of how expensive it would be to lend money from investors. The cost of debt is measured by how much the bank will charge on the loans for your company. This can be used as an indication of future borrowing rates and what they might entail.
Assuming that the value of a company's assets is equal to the book value of those assets
Assuming your book value of the assets your company has is equal to its current market value is another common mistake made by business owners.
It's important you look at the amount of revenue generated and what your margins are like when estimating the fair price and what approach you would take for it to work effectively.
Taking into account internal factors, in additions there are also the external factors like:
- Competition
- Government regulations
This will all depend on the company you have and the type of industry you operate within.
Intangible Factors
Lastly, when valuing a company, a common mistake many owners do is to ignore the intangible factors like:
- brand equity
- customer loyalty
Although it can be difficult to calculate these factors, they are still important to consider if you require an accurate valuation for your business!
These assets include goodwill or the reputation of the products. They can also include any patents or trademarks the company has obtained that will allow you to operate more efficiently than your competitors in the market.
When it comes to customer loyalty this comes down to the continuation of purchasing from your business even when the economy is poor, because they know your product/service inside-out.
Ignoring Potential Risks
Lastly, ignoring any potential risks such as changes in regulations or competition.
It’s important to know how your product/service will be impacted as these risks can have huge implications on the value of your business if not taken seriously.
External factors no matter what they entail will have an effect on your company and its value. So, it’s important to take them into account when you have a business valuation completed.
Valuing a company is no easy task but our team are specialised in all business-related purposes and can guarantee a valuation report that is detailed and helps you in any decisions you may have regarding the future potential and success of your business, at the end of the day it's one of your biggest assets and you want to know you’re on the right track.