For some small business owners, the long-term plan is to build their company up and sell it when the value is at its highest. But according to research by business valuation firm BizEquity, 75 percent of businesses don't have an accurate measure of their worth.
"Millions of businesses will change hands in the U.S. over the next 10 years," said Mike Carter, CEO of BizEquity. "This can mean hundreds of thousands of dollars lost to business owners if they think their company is worth less than it really is."
The reason so many business owners don't know their company's worth is they don't add their expenses back into the total value, Carter said. [5 Ways to Prepare Your Business Before You Sell It]
"Most businesses are run to be tax efficient, which means lowering your earnings through a lot of expenses," he told Business News Daily. "These expenses should still be calculated into the value of a company through Seller's Discretionary Earnings."
Seller's Discretionary Earnings (SDE) is a measure of a business's net profits with certain expenses added back. These expenses are generally ones that benefit the business owner, such as the owner's salary, insurance premiums and larger one-time expenditures. Knowing your SDE and total revenue is crucial to gaining an accurate valuation of your company.
In addition to being aware of your SDE and revenue, Carter recommended following these steps to determine your business's value:
Research your industry. Utilize free search tools to find the North American Industry Classification System (NAICS) and Standard Industrial Classification (SIC) codes for your specific business. This will help you compare your value to other businesses in your sector.
Think about your growth rate. Long-term growth rate can factor into your business's value, and could account for why your company is actually worth more than what the market says.
- Don't only use the buyer's valuation. When you're ready to sell, a buyer may make an offer based on his or her valuation of your business. Before completing the sale, be sure to get another third-party value assessment to ensure you're not underselling your company.
Originally published on Business News Daily.