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Business Valuations: External Factors Affecting a Sale

How much is your business really worth? Practically speaking, there is a difference between book value and actual value. In the real world, the value you place on your business will generally be greater than the amount you could receive in an actual sale. Thus, the valuation effectively forms the starting point for negotiations.

Keeping that in mind, you might tilt the valuation to the higher side, because you can expect any buyer to try to negotiate a lower price. The valuation may also be affected by external factors such as industry trends and interest rates.

Details: A potential buyer will not value the business until it has been examined inside and out. Then the buyer will rely on a professional expert for an appraisal that sets a realistic value. It is likely that any buyer will use a different valuation method than the one you have used. Frequently, buyers will find a value that can compensate them for the return they expect to receive by investing in the business.

As a result, the buyer will undoubtedly perform a thorough analysis of the profitability of your business with an emphasis on future performance. Otherwise, why would they bother to buy the business interest? In return, you should prepare for an offer based on the projected profitability in the future—not its current status.

When the negotiating process enters its serious stage, you will realize a fundamental aspect of valuation: Your business is only worth what someone else is willing to pay for it—no more, no less. Of course, there are certain external factors that can have a significant impact on the valuation of your business and cause it to fluctuate. By recognizing these factors, you may be able to generate a higher value for your business.

In most cases, the determining factors will be the market demand for your product or service and the industry status as a whole. If demand is low, it will suggest reduced profitability. Therefore, it might be advantageous to postpone your plans to sell the business until demand increases or, at the very least, stabilizes.

Interest rates may also have a significant effect on a business valuation. When rates are climbing, it generally affects cash flow, because any outstanding debts will incur higher charges. Due to this factor, the best time to sell a business is often when interest rates are relatively low.

Selling a business can be a nerve-wracking experience. However, if you enlist the services of a valuation expert, the process can go more smoothly than you might anticipate. This professional should be a key member of your team.

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	[ return to list ] Business Valuations: External Factors Affecting a Sale How much is your business really worth? Practically speaking, there is a difference between book value and actual value. In the real world, the value you place on your business will generally be greater than the amount you could receive in an actual sale. Thus, the valuation effectively forms the starting point for negotiations. Keeping that in mind, you might tilt the valuation to the higher side, because you can expect any buyer to try to negotiate a lower price. The valuation may also be affected by external factors such as industry trends and interest rates. Details: A potential buyer will not value the business until it has been examined inside and out. Then the buyer will rely on a professional expert for an appraisal that sets a realistic value. It is likely that any buyer will use a different valuation method than the one you have used. Frequently, buyers will find a value that can compensate them for the return they expect to receive by investing in the business. As a result, the buyer will undoubtedly perform a thorough analysis of the profitability of your business with an emphasis on future performance. Otherwise, why would they bother to buy the business interest? In return, you should prepare for an offer based on the projected profitability in the future—not its current status. When the negotiating process enters its serious stage, you will realize a fundamental aspect of valuation: Your business is only worth what someone else is willing to pay for it—no more, no less. Of course, there are certain external factors that can have a significant impact on the valuation of your business and cause it to fluctuate. By recognizing these factors, you may be able to generate a higher value for your business. In most cases, the determining factors will be the market demand for your product or service and the industry status as a whole. If demand is low, it will suggest reduced profitability. Therefore, it might be advantageous to postpone your plans to sell the business until demand increases or, at the very least, stabilizes. Interest rates may also have a significant effect on a business valuation. When rates are climbing, it generally affects cash flow, because any outstanding debts will incur higher charges. Due to this factor, the best time to sell a business is often when interest rates are relatively low. Selling a business can be a nerve-wracking experience. However, if you enlist the services of a valuation expert, the process can go more smoothly than you might anticipate. This professional should be a key member of your team. [ return to list ]
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