Business Valuation Guide

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Business Valuation Guide

Aug 09, 2022

When was the last time someone asked you how much your business is worth? Have you ever had a business valuation performed? Would you even be able to quantify its value if someone put you on the spot?

The truth is that many small business owners don’t know how much their business is worth until they decide it’s time for an exit strategy, and they need to put a price tag on their hard work. It’s a mistake not to know what that number is at any given time – whether or not you’re ready to sell.

Here’s a quick-start guide to understanding business valuation, why it’s important, the best methods for calculating valuation, and the importance of reaching out for help during the process.

Business Valuation Defined

Not only can business valuation be complicated, but there are also actual emotions involved – yours, as the business owner. This could complicate things even further, as the sweat equity you put into your company is almost impossible to quantify.

The reason behind the valuation also plays a vital role in the final number. Are you planning to sell? What kind of buyer do you have on the line? Is the valuation for a lending opportunity? Or is it to prepare a pitch to investors? “Fair market value” of your business may mean many different things to the parties involved.

Ultimately, the most accurate valuation will come from working with an industry-accredited appraiser. These are experienced, qualified financial experts who work hard to understand best the current market and the value of businesses within it. There’s still an art to valuation, despite the mathematical work appraisers do to quantify your business as an asset.

Methods for Valuating Your Business

While there is no singular formula for accurately valuing your business, there are some tried-and-true methods of calculating what your business is worth depending on the end goal of valuation.

Discounted cash flow: This method is based on the expected cash flow of your business. The real-time value of your business today depends largely on the money it will make in the future. Here’s how to calculate DCF:

Calculating the DCF involves three basic steps—one, forecast the expected cash flows from the investment. Two, you select a discount rate, typically based on the cost of financing the investment or the opportunity cost presented by alternative investments. Three, the final step is to discount the forecasted cash flows back to the present day, using a financial calculator, a spreadsheet, or a manual calculation.

Asset-based: Valuing businesses based on hard assets is a standard method, especially for those businesses that own real estate or expensive equipment. The dollar value of assets is added up, and liabilities (like debt) are subtracted to get a fair market value of your business.

Comparables approach: Using the comparables approach to valuation quantifies a business’ value based on competing, comparable businesses within the same industry. This less common valuation method leaves a significant margin for error; it’s not always easy to make an apples-to-apples comparison even if two businesses look nearly identical on paper.

Need Help With Business Valuation?

Trust us – we know better than anyone how overwhelming it can be to gather the financial records and documents needed for accurate business valuation. If you’re like the small business owners we work with daily, you likely don’t have much time to spare for this process.

Simply put, every business needs a roadmap, a plan for getting from the initial stages to the ultimate goal. Of course, for a plan to be successful, it needs to consider the specifics. This is where the financial analysis of benchmarking comes into play, as it can provide an accurate breakdown of your business’ current standing in relation to the road ahead. This process also extends to forecasting, as the distance between you and your goals, and the best ways to close it, are also addressed.

Financial benchmarking also serves to:

Enable you to gather accurate operational data for measuring success.
Analyze the various areas of your business to identify the promising sectors and those needing improvement.
Set performance benchmarks in crucial areas.
Insert specific goals and processes into your underlying strategy to help you reach or surpass established benchmarks.

The Alexander Group will cover every element of your business necessary to achieve your vision. As part of the benchmarking process, this can mean using regression analysis to project forward and establish what comes next. Whether it’s benchmarking, strategic planning or coaching for your general decision-making, The Alexander Group is fully qualified to help you move in the right direction.

We’ll work with you to ensure your business supports your vision. Once a plan is ready to go, we’ll be there every step to ensure things proceed as they should. Contact us today to get started!

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What Small Business Owners Need to Know About Email Authentication Requirements

08 Mar, 2024

Have you been having trouble sending out bulk emails and email blasts recently? Are you suddenly having deliverability issues with clients and vendors you've been emailing for years? If so, you're not alone — Google and Yahoo rolled out new DMARC requirements in February, creating headaches. We have heard that many of our small business owner clients and their IT departments are having such headaches. To investigate this issue, we have leaned on IT expert and long-time TAG peer board member Fred Moore of Moore Computing. Fred has walked us through changes to DMARC and offers advice on how small business owners can get their emails back into the inbox. While DMARC changes have thrown many into a temporary tailspin, the changes represent a move to safer and more secure email communication for all parties. Let's discuss what small business owners need to know about DMARC, how they can ensure their emails reach customers' inboxes, and how to keep their business digitally secure. What is DMARC? Cybersecurity measures are similar to cars: most of us drive one daily, but most are unable to lift the hood and understand exactly how it runs. Most of us rely on cybersecurity measures to keep our businesses safe online, but we may need help understanding the technical elements that keep us safe. That said, all small business owners should have a general background in cybersecurity, and DMARC is a great place to start. DMARC stands for "Domain-based Message Authentication, Reporting & Conformance." The idea behind DMARC is to limit the volume of scams and phishing on the internet. DMARC works with SPF and DKIM. SPF (Sender Policy Framework) is a list of services and servers that are authorized to send emails on behalf of your domain, and DKIM (DomainKeys Identified Mail) is a digital seal that verifies the content of your email hasn't been altered or tampered with. DKIM is also able to withstand email forwarding, whereas SPF can not. Senders and Recipients At its core, DMARC validates the authentication of the sender of an email message. When there are deliverability issues with a message, it usually falls back on the sender. Small business owners know the importance of getting marketing campaign emails and other communications into their customers/clients' inboxes; to accomplish this, it is crucial to follow all protocols to ensure you have the best chances to reach customers' inboxes at an optimal place (i.e., not the spam folder), and avoid spam complaints. How does your email make its way to recipients? It follows a basic flow: ● The email is composed and sent ● The sending mail server will add DKIM ● The email is sent to the recipient's server ● Validation tests begin, checking DKIM, SPF, and DMARC policies ● The email either passes, is quarantined, or is blocked/deleted ● If the email passes, it goes through the recipient's user filters and inbox rules

The Costly Mistakes of DIY: Why Small Business Owners Should Invest in Professionals

11 Jan, 2024

Running a small business is a challenging task. It requires dedication, hard work, and juggling multiple responsibilities. Often, small business owners try to cut costs by taking on tasks themselves, even if they are better off calling a professional. While the intention may be to save money, the reality is that DIY can lead to costly mistakes and legal pitfalls. Let's explore the common mistakes small business owners make when they opt for a do-it-yourself approach and why investing in professionals like lawyers, accountants, and general contractors is crucial for long-term success. The Myth of Saving Money Many small business owners believe that handling tasks themselves will save them money in the long run. However, this is often a misconception. While it may seem cost-effective initially, the lack of expertise and knowledge in critical areas can lead to costly mistakes that can ultimately hinder the growth and profitability of a business. The Value of Professional Services Professional services, such as lawyers, accountants, advisors, and general contractors, bring expertise, experience, and a deep understanding of industry regulations. They can provide valuable guidance, prevent legal issues, and help small business owners make informed decisions that align with their long-term goals. Most of the time, business owners don't consult with their advisors because they are wary of spending money on bills from their advisors on top of other expenses. The phrase "You can pay me now, or really pay me later" comes into play in these situations. Business owners should not be afraid to discuss money and bills from professionals with their advisors, and they should properly compensate advisors for their time. Complaining about spending a few thousand dollars to review a $20,000,000 contract can cost hundreds of thousands due to difficult payment and dispute resolution terms. Protecting Your Intellectual Property Intellectual property (IP) is a valuable asset for any business. Failing to protect it can lead to brand confusion, loss of revenue, and legal battles. Trademarks, copyrights, and patents should be filed appropriately and protected to ensure exclusive rights to your brand name, logo, or product design. How Professionals Can Help Lawyers specializing in intellectual property can guide small business owners through filing the necessary documents and paying the required fees. They can conduct an IP audit to identify and protect essential assets, develop IP protection strategies, and enforce IP rights if violations occur.

What Business Owners Can Learn From Al Pacino’s Locker Room Speech in “Any Given Sunday”

09 Oct, 2023

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