Two Difficult Factors in Valuing a Small Business

How to value a small businessMany factors go into valuing a business, but brokers find these two factors to add difficulties when valuing a small restoration business:
Record Keeping and Owner’s Earning Power.

It is not uncommon for many small business owners to give bills and receipts to their bookkeeper or accountant and let them sort it out. Not only are they to figure out the balancing of the books but they also have to prepare reports for reporting to the IRS and tax returns which is an ongoing task throughout the year. In all fairness, if that is what they are hired to do, then so be it. But what the bookkeeper doesn’t see or know can hurt.

The clever business owner’s bookkeeping is one that can hurt the value of a business. What do I mean by this? Small businesses are known for reducing their tax liability. There is nothing wrong with trying to keep more of what you earned; I too don’t enjoy paying Uncle Sam a good portion of my earnings, but unfortunately it is part of the game that we play. So what is my point you might ask? My point is that when you reduce your tax liability you also reduce the value of the business. Here’s an example of what I mean: When you prepare your business to be sold it is important that your profit and loss statements (schedule C) be stated to reflect as much real cash flow as possible. You also want to ensure that ALL income is reported, for two reasons: one it is illegal not to report it and two, we want to show a healthy cash flow.

Another problem I run into when valuing a business is the MVP factor. Many small businesses are built on reputation of the owner and not the business itself. Ever heard, “Call Jim, he’ll take care of you.” Not “Call ABC Company, they are fantastic and will take care of you.” What this tells the future owner is that once the owner leaves a lot of earning power goes with him or her. This reduces the value significantly.

Many small restoration business owners find themselves with these issues once they are ready to sell. Here’s a secret. Start preparing yourself at least three years out, that way when it comes time to sell, you and your business will be ready.

Topics: value

Gokul Padmanabhan

Written by Gokul Padmanabhan

Gokul Padmanabhan has devoted the past 15 years to buying and selling businesses, much of that in the restoration industry. His partnership with RESCON Business Brokers strengthens his hands-on expertise with a national presence and infrastructure that is second to none.