Do You Need a Professional Valuation Before Buying a Business?

For most small businesses, hiring a professional to perform a valuation is not necessary. First of all it is expensive, and more often than not, it simply does not reflect reality.

For example, I recently read a valuation on a local company handling specialized telecom components in a very restricted marketplace. This company was doing $700,000 a year in sales and netting $100,000. The valuation started off:

“The company is focused upon the B2B telephony segment which is a $42 billion industry in North America.”

I threw out the entire report after reading that one sentence. Why? How on earth can you possibly compare a $42 billion dollar industry and a $700,000 local distributor of telephone systems? 

So my advice, based on a lifetime of experience in buying and selling businesses, is don’t waste time or money getting a professional valuation done. Let the sellers do that if they so choose. If you want to look at a variety of scenarios, there are some very good, inexpensive software packages available that will do the same thing at a fraction of the cost. (Do an Internet search for the key term “business valuation software” and you will find them easily.)

Key Points to Remember

• Valuations are not scientifically based; they’re subjective. In other words, valuation is an art, not a science!
• Uncover how the seller established the asking price.
• Valuation is a personal formula - The real question is, what’s the business worth to YOU?
• Consider the potential return on your cash investment.
• Use a variety of methods to value a business you are considering. We explore these valuation methods in depth in my Trump University course, The Art of Buying a Business. For a quick introduction to them, be sure to visit this blog again next Tuesday to read Michael Sexton’s post.  

The Final Word: Never, ever buy a business just because the price is right - if you want to create wealth, be certain that the business itself is right for you!