Business Valuations (How to Value a Business)
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Business Valuation Misconceptions
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There are many misconceptions about business valuations. Let’s take a look at some of the most common misconceptions.

Misconception 1: Only Value a Business When You Are Going to Buy or Sell It

As mentioned on the previous page, there are many reasons to value a business. As such, you should not only consider valuing a business when it’s time to sell or purchase a business. If you only value a business during the purchase or sale of it, you’ll likely run into problems when you need a value on the business for other reasons (as mentioned on the previous page). So, make sure to fully understand the nature of your business and when its valuation may come into play.

Misconception 2: If Your Business Loses Money, It’s Not Worth the Time & Money To Value It

A business that appears to be losing money may actually be doing well. For example, many small businesses often give out large bonuses and/or other rewards at the end of the year. By doing so, it may appear that the business is not worth much. This is because the bonuses and/or rewards are listed as company expenses, and take away from the company’s profits. However, the owners and/or employees are still receiving the money, but just in a different form than profits.

Now, bonuses and rewards may be given out to owners and/or employees, but only for legitimate business reasons. If the owners give out large bonuses and/or rewards to avoid paying taxes, this is illegal and the IRS will likely be knocking on your company’s door! Giving out large bonuses to avoid paying taxes is known as zeroing out or bottoming out. Make sure to never "zero out" your business, and only grant reasonable bonuses for legitimate business purposes.

So, it’s often still a good idea to value a business even if the business appears to be losing money.

Misconception 3: I Don’t Need to Value My Business Because I Know What Some Similar Businesses Are Worth

Valuing a business is a very fact specific endeavor. Even if you know the values of some of your competitors’ businesses, that is no substitute for the value of your business. There are so many variables in a business valuation that you should not just assume the value of your business based on other businesses. It is always better to value your business based on all of your business’s factors.

Misconception 4: I Valued My Business Once, So I Won’t Have To Do It Again

Maybe not, maybe yes. Valuing a business is the same in concept as valuing other things. Values rise and fall, and sometimes dramatically in a short period of time. Just because you valued your business a few years ago does not mean that the current value is the same. In fact, it’s much more likely that the value has changed. Think about how much the value of a stock changes on the New York Stock Exchange. You’re business likely changes in many of the same ways.

Also, a key concept (which we’ll discuss later) to remember is that a business valuation only applies to the particular date in which its valuation is completed.

Next, we’ll take a look at what is "value" in business valuation.

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