Common Misconceptions About Business Value

When it comes time to sell the company, owners often believe their business is worth far more than it really is. Valuation analysts are often the bearers of bad—but realistic—news in this regard, explaining that value depends on several factors, including the nature of the buyer.

In a recent article on Axial, author Al Danto enumerates common misconceptions about value:

There is one “right” way to assess value. Not true. There are many ways to value a business. Experienced valuation analysts choose the appropriate approach—income, market, or cost—along with the valuation standard that fits the valuation purpose and use. Each valuation is different and based on the target company’s specific circumstances.

Lots of assets equal lots of value. Value depends on a company’s ability to generate cash flow. For example, in asset-heavy companies, equipment and machinery are integral to the company’s operations. Liquidating assets is not the way to create return on investment in an ongoing company. If the company cannot operate, it cannot generate cash flow.

I can expect a valuation in line with industry average. Wouldn’t it be nice if valuation were this easy? Even companies in the same industry can have a wide range of value because every company has a unique set of circumstances. It may seem that similar companies share risks and variables, but a deep dive into the numbers will reveal distinct conditions.

Personal expenses can just be added back to cash flow. No. You must clean up your company’s finances before even considering a sale. Running personal expenses through the company will reflect in the cash flows. Presenting a realistic picture of the company is vitally important, not only to the company’s valuation but also to the owner’s credibility.

Considering a sale? Our business valuation team can work for you to reach the realistic value of your company.

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