News & Events
The Fallacy Of Online Business Valuation Calculators
ENLIGN DEAL TEAM | 03/20/2017
RALEIGH, NC – Jeff Snell has written the following article addressing the many shortcomings and failures involved in relying upon so called "Online Business Valuation Calculators".
If you've been a business owner or advisor for any period of time you have surely realized that no two businesses are the same. Even franchises that attempt to model themselves similarly have different geographic locations, different employees, customers, sales, costs, management and marketing requirements which all impact the valuation of a particular business.
Any online (non-expert human valuator/appraiser) has to rely on averages and assumptions - and unfortunately there are too many that are too important for current technology to address effectively.
Even people who offer these "tools" on their website state that "determining the worth of your business is as much of an art as science". Really? How does the online calculator process the hundreds of different factors that fall into the 'art' category? Fact is that they just don't. Other disclaimers "this is no more than a back of envelope calculation". Back of envelope? What good is that? This is YOUR BUSINESS - not a used car! Then you may hear that businesses valued under $5 million in enterprise value may be valued with "unconventional methods". That's code for methods that are industry standard, but that they don't understand.
For example; two jewelry stores with $10,000,000 in annual sales and $1,000,000 in EBITDA are being valued. You're already asking all kinds of questions like "How many locations each?", "What type of jewelry?", "How long have they been in business?", "Are sales trends up? down? flat?". All questions the online 'tool' either doesn't collect or can't process well. Is inventory included? Is all the inventory sellable or has some gone out of style? Are there new regulations in the industry? Are regulations being lifted? Do they own the commercial property or rent? Online sales? Easily relocatable? These things matter.
How does the online tool address the sale of only part of the business - known as a minority interest discount? How does it address the three local competitors that have opened in the past year? or is Amazon entering the space? How about there being a key employee issue or an extremely valuable patent portfolio? Has the company recently lost a large client? These all require individual analysis and the online tool doesn't. FAIL. FAIL. FAIL. FAIL. FAIL.
Is a million dollars of EBITDA in food service worth the same as in manufacturing? (Hint: No.) Is a million dollars of EBITDA in auto manufacturing worth the same as a million dollars of EBITDA in the floral industry? (Another Hint: No.)
There are literally hundreds of examples that could be provided, each alone having significant impact on the true value of the company. Don't leave something as important as the value of your largest asset up to chance.
Experienced business valuation experts are not hard to find. Certified Business Intermediaries are experienced in valuing "main-street" businesses - generally under $1,000,000 of enterprise value (using conventional methods by the way). Merger and Acquisition Master Intermediaries and Certified Valuation Analysts can value lower mid-market businesses worth up to $50,000,000. Find them at www.ibba.org and www.masource.org.
Unless you're looking to kill some time don't place any value on a number produced by a website. Quality business valuations can cost as little as $2,500 and as is with our firm that amount also covers the listing fee if you elect to sell. Odds are the online valuation is nothing but a marketing tool for a broker looking for listings who is going to have to pull a bait and switch.
In conclusion, when you need to know the value of your business, trust a professional - not a online valuation gimmick.
ENLIGN, Business Brokers, Advisors, Jeff Snell, online valuation, NC, North Carolina, Wake county, tool, calculator, program, assumption
About ENLIGN Business Brokers:
ENLIGN Business Brokers, which has its headquarters in Raleigh, NC and regional offices in Charlotte, NC, Greensboro, NC, Nashville, TN and Denver, CO, provides seller and buyer services, professional negotiation, and valuation and marketing services to small and medium business sellers and buyers. ENLIGN provides business owners wishing to sell their businesses with discrete, objective counsel and valuation advice implementing an innovative, comprehensive approach to marketing businesses for sale. Complete confidentiality is offered throughout the process. ENLIGN, which is a member of the International Business Brokers Association (IBBA), M&A Source and the American Business Brokers Association (ABBA), requires that its agents and affiliates have owned a successful business of their own, hold an advanced degree and be members of IBBA working towards or having completed the Certified Business Intermediary (CBI) accreditation. For more information about buying or selling a business or becoming an ENLIGN affiliate broker, contact Jeff Snell at firstname.lastname@example.org or visit the Web site at www.enlign.com.