The Perils of Online Business Valuations

Online business valuations can be fun. Much like fortune cookies, you really don’t know what you are getting until you crack it open. After all, it can be exciting to open a report that says you own a very valuable business. If you use the same online valuation website every year, you may enjoy watching the answer change over time.

For an online business valuation, the do-it-yourself process is fairly simple. The fee is charged to your credit card, a rather painless $25-$75, perhaps up to $250-$500, depending on the website or service. And you only invest a little time answering a series of online questions and keying in a few numbers from your income statement and balance sheet. For most of these online services, once you press the send button, your appraisal report is available for immediate download or arrives almost instantly to your inbox. Not much time for anticipation, and oh, what a feeling to get that answer!

The Not So Fun

The appraisal report hits your inbox so fast that surely no one really read the information that you submitted or personally compared your business to other businesses that have sold in your industry. The key factors contributing to the price multiple, which include the risk and growth potential of your business, have not been considered by a human. The conclusion is typically based on automated calculations and formulas, a.k.a. algorithms.

While the charts and diagrams look pretty, as you read the appraisal report, you may be surprised to see all the boilerplate content and definitions of jargon, but very little real industry data showing a comparison to your business. What criteria were used to make comparisons and where is the supporting data? Which valuation methods were used and why?

Some online valuation services use several valuation methods, but the results of each method are drastically far apart. No explanation is given for the value disparity, or perhaps they just apply an average of the methods (that can be scary). And look out for the disclaimers in the fine print of the report about actually relying on the value conclusion. In fact, some online appraisal reports claim not to be appraisal reports at all (confusing? Yes).

These experiences can leave you wishing you had spent the cost of that report on another round of golf (or, for me, live bait to go kayak fishing).

The Ugly

The sad part about these online business valuation services is that some business owners have actually relied upon their output to make critical business and investment decisions, ranging from exit planning to utilizing the report in a tax filing. If the value conclusion is ever challenged, there is no real support available regarding the analysis, since it is all based on the black-box algorithms.

With online business valuations seeming like such a “deal,” you will definitely get what you pay for…or less.

The Solution

Just like people, no two businesses are alike. Each business has unique characteristics which impact revenue growth, profitability, asset utilization, financial leverage, and risk profile. These are primary elements that impact business value.

If the real value of a business is important to you, seek out an independent qualified business appraiser. While there are no federal licensure requirements for business appraisers, qualified business appraisers will voluntarily hold valuation credentials such as Certified Valuation Analyst, Accredited Senior Appraiser or Certified Business Appraiser to name a few. With these designations come required valuation experience levels, continuing education requirements, and compliance with strict valuation standards. In addition, ask for a summary of professional qualifications and a sample report. Beware of part-timers or valuation hobbyists who may not keep up with continuing education, or may not invest in all the resources and databases necessary to provide a comprehensive analysis. Seek an appraiser who is truly independent of you and your company, not providing you with other professional services.

It is not uncommon for a business valuation performed by a qualified appraiser to cost $5,000 to $15,000 for small to lower middle-market businesses, depending on the complexity of the assignment. Litigation related assignments and companies with multiple divisions may cost more. In most cases, the appraiser can provide you with a specific fee quote after asking a few basic questions about the business.

Highlights of the valuation process typically include onsite management interviews, analysis of historical financial statements and business outlook, economic and industry research, as well as a search of transactional databases for similar businesses that have sold. In addition to completing a preliminary questionnaire and collecting financial information, be prepared to spend a few hours with the appraiser in most cases.

The appraisal report will discuss your business operations, assess financial performance, compare your business to industry statistics (yes, included in the report). The income, market and/or cost approach will be properly applied as appropriate (a topic for another article) and explained. Rest assured, the appraisal report written by a qualified appraiser will not look like an online business valuation report. Depending on the complexity, the entire process may take a few weeks to a month or more.

To recap, online business valuations can be a fun impulse buy, like the candy at the cash register (I can never eat just one). But if you think your business has any material value, you’ll get a much better ROI by investing in a valuation performed by a qualified business appraiser. In many cases, there is ultimately a much higher cost of not having a qualified business valuation: leaving money on the negotiating table or making decisions from a position of uninformed vulnerability.


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