What Causes a Low Business Valuation?
Business valuations are critical whether you are buying, growing, or selling a business. An accurate valuation can help you secure financing, set an effective listing price, or take the steps to maximize the value of your company. However, it can be disheartening if a business valuation comes back lower than expected. The first step to addressing a low business valuation is understanding what caused it.
Peak Business Valuation is happy to help! As a professional business appraiser, Peak values thousands of businesses throughout the United States. We help businesses navigate low valuations on a regular basis. As such, Peak can provide you with a business appraisal and provide valuable guidance to help you move forward whether you want to buy, grow, or sell a business. Start today by scheduling a free consultation with Peak Business Valuation below!
What Causes a Low Business Valuation?
Several factors can cause a business valuation to be lower than your estimate. In this article, we explore the most common causes of low valuations. For more applicable guidance, it is best to obtain a business valuation. Reach out to Peak Business Valuation today!
Financial Performance Issues
One of the primary determinants of a business’s valuation is its financial performance. A company’s profitability, revenue growth, and cash flow are key indicators of its health and growth potential. Poor financial performance is often illustrated by a low business valuation. Below are a few financial metrics a business appraiser may find when the business valuation comes in low.
- Declining Revenue: Consistent revenue decline is a sign of instability to business appraisers. Declining sales can indicate a lack of demand, intense competition, or poor management. This has a major impact on the value of a business.
- Inconsistent or Fluctuating Cash Flow: Stable and predictable cash flow is a crucial component of a business’s value. If cash flow is unstable, it raises red flags for business appraisers and investors.
- Low-Profit Margins: Profit margins indicate the financial ability of a business. If a business operates on thin profit margins, it has less flexibility to deal with challenges.
To better understand the importance of financial performance, see Financial Statement Analysis.
High Operating Costs and Liabilities
Next, a company’s operating expenses and liabilities have a significant influence on its value. High operating costs affect profit margins and liabilities can reduce a business’s overall value. Here are a couple of important considerations that may contribute to a low valuation:
- Excessive Overhead Costs: Businesses that have high overhead expenses, such as rent, utilities, and administrative costs, will see lower profit margins. Business appraisers consider whether these costs are necessary or if they can be reduced in the future.
- Debt and Liabilities: Significant debt obligations or outstanding liabilities can lower a business’s value. Peak Business Valuation will assess a business’s debts and liabilities as part of the valuation process.
Unrealistic Expectations from Sellers
Moving on, sellers often set an asking price for their business based on unrealistic expectations. Valuation experts use data and proven valuation methods to arrive at an objective valuation. Below are a few common mistakes sellers make when pricing their businesses:
- Overestimating Future Growth: Sellers may assume significant future growth for their business. This can lead them to set a high price in comparison to its current performance. When valuing a business, a business appraiser considers historical performance and realistic future projections.
- Ignoring Market Trends: Some sellers fail to account for external factors that influence their business. If a business operates in a declining or highly competitive industry, its valuation may be lower than expected.
As a professional business appraiser, Peak Business Valuation can help you establish realistic expectations for selling your business. We can provide you with insights into your business’s market position, risks, opportunities, strengths, and weaknesses. In addition, Peak uses proven methods to provide an objective valuation for your business. Schedule your free consultation with Peak Business Valuation to start today!
Incomplete or Inaccurate Financial Records
Moreover, financial documentation is essential for a business appraisal. Incomplete, outdated, or inaccurate financial records can lead to a low valuation. This is especially true for small businesses. Consider the following points:
- Poor Record-Keeping: If a company’s financial statements are missing or poorly organized, it can be difficult for valuation experts to determine an accurate value. As such, accurate records of income, expenses, assets, and liabilities are crucial to valuing a business.
- Unreported Cash Sales: Some small businesses may receive unreported cash sales. While this may reduce tax liabilities, these earnings are not considered during the business valuation, resulting in a lower value estimate.
Intangible Assets Not Properly Valued
Finally, although tangible assets like equipment and real estate are easy to value, intangible assets such as brand reputation, intellectual property, and customer relationships are more complex. If these assets are not properly valued, you may receive a low valuation. Some common intangible assets include:
- Brand Value: A well-established brand can be a significant asset, but is not always accounted for in a business appraisal. If the brand’s reputation and market position are not factored in, the valuation may not truly reflect a business’s value. As such, it is important to work with an experienced professional business appraiser like Peak Business Valuation.
- Customer Loyalty: A strong and loyal customer base is another key contributor to a business’s value. Without proper guidance, assigning a value to your customer base is difficult. For more information, check out The Value of Customer Loyalty.
Conclusion
Receiving a low business valuation can be concerning, but there are various ways to address a low valuation. The first step is understanding what caused the low appraisal. Business valuations may come in lower than expected for several reasons. By understanding the factors that contribute to a valuation, you can take steps to increase a business’s value whether you are buying, growing, or selling a business.
At Peak Business Valuation, professional business appraiser, we frequently help businesses understand and address low valuations. We are happy to provide you with an accurate business appraisal and answer any questions you have. To get started, schedule a free consultation with Peak Business Valuation below!
