You read in the paper that a local business just sold for $15 million. You feel your company is about one-third the size of that operation. Does that mean you have a $5 million business?
A friend said she heard you can determine the worth of a business by multiplying its income by six and suggests you do so. Is that the way it’s done?
Both examples, a local expert on the subject says, are incorrect.
“Neither of those business valuation methods are reliable,” says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley. “For example, a small software company named WhatsApp would have valued itself at between $50 and $60 million using the six-times-income method. But last year, they sold themselves to Facebook for $19 billion — more than 300 times higher.”
If you want to learn what your business actually is worth, Anderson says, you need the assistance of a highly qualified and experienced business valuation expert.
There are myriad reasons a company may want to know its actual value. These can include shareholder or partner disputes; gifting a portion of the business; sales, mergers and acquisitions; divorce settlements; estate and trust matters; insolvency and many more.
Acknowledging each case is different, Anderson said there are two basic types of business valuations. A calculation of value is a less formal process that provides a reliable approximation of the worth of your business while a full-blown formal business valuation is important for estate planning, gifting and litigation.
A Certified Valuation Analyst will calculate your business’s true income by examining salaries, expenses, profits, losses and other information. Are you paying yourself or your family members more or less than what outside managers would cost? Do you have company cars or any deferred compensation programs for family members or are there any other expenses a third party would not incur? Do you have one-time expenses related a lawsuit or losses from a natural disaster?
In calculating your business’s worth, a professional business valuation expert also considers industry, geographic and economic factors, as well as recent sales of businesses like yours.
Determining the value of your business is not a process for psychics or soothsayers, and guessing or ballpark estimating won’t do. Be safe and smart and count on a Certified Valuation Analyst to figure out just what your business is worth.
If you require the services of a certified business valuation expert, please contact the Philadelphia forensic accounting firm of David Anderson & Associates today by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.
