4 Common Business Valuation Mistakes to Avoid

Oct 14 2016

Avoiding these business valuation mistakes can pay off in the long run.There are 26.5 million businesses currently operating in the United States, and no matter their size, they should all be valuated at critical points in their lives. However, there is a right and a wrong way to value a business.

Mistakes happen all the time, but when there are mistakes in business valuation reports, it can seriously harm a business. Here are a few mistakes that can lead to overstating business value and how to avoid them.

Deferred Maintenance

Many times when business owners want to retire or are ready to sell their business, they may deliberately neglect the repair or replacement of equipment necessary to run their business. In turn, they may lie to business valuation services about the value of their assets.

However, doing this may distort the values reached by business valuation services. In addition, new owners may have to shell out additional funds to pull the business up to where it needs to be.

Undercapitalization

Some business owners may seem like they’re doing well, but they may simply be skilled at running their businesses on “vapor”, meaning they use credit generously granted to them by select vendors to reduce working capital requirements.

These business owners may be able to raise capital for family and friends, but a new business owner may not have the credit necessary.

Understated Payroll

Employees are the life force of every business. In a small business, the owner often performs key roles. This is called “sweat equity.” However, if a business sells, it may be extremely difficult for the new owners to find employees to fill those key positions.

Hidden Operating Costs

Business valuation tools rely on exact numbers to create their total. However, if there are businesses that are highly efficient and find a way to circumnavigate operating costs. However, if a business is looking to sell, then it may be difficult for new owners to replicate their efficient process just by looking at the small business appraisal.

Business valuation is an important process for countless business owners that can seriously affect their decision to retire, sell, or even continue with a startup project.

Find out exactly where the value of a business stands by starting your free trial of PeerComps today!