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For small businesses, valuation is a way of assessing the value of what may be their most precious asset. With some small businesses receiving offers from valuation firms, it may be easy to say yes-provided that you’re willing to pay.
Business owners however, should avoid these solicitations and wait for their own right moment to pursue valuation for their business. “Fishing for work by valuation firms when there is no real need is both unprofessional and a waste of client resources, money, time, and efforts,” wrote Jack Bakken, past president of the American Society of Appraisers, in a Bloomberg Business Week article.
Valuations for businesses can cost anywhere from a couple of thousand to tens of thousands of dollars. “Most commonly they are done for tax purposes, such as estate settlement, income tax or property tax disputes, or litigation, or to satisfy the annual requirements for Employee Stock Ownership Plans,” Bakken notes.
In terms of figuring out how often businesses should consider valuation, Julie Gordon White, principal at BlueKey Business Brokerage Mergers & Acquisitions, recommends that owners have a rough estimate once each year.
Bloomberg BusinessWeek points to the following strategy to develop a rough estimate: “Figure your business’s discretionary earnings for the past three years: That’s net profit plus owner’s salary and benefits (health insurance or a company car, perhaps) added to interest, amortization, and depreciation—all figures you should be able to find on your tax returns. Next, average that number over the three years. If the result is $100,000 or less, multiply it by two; if it’s $100,000 to $300,000, multiply it by three; if it’s over $500,000, multiply by four.”
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