It can be quite tempting for business owners, potential buyers and even prospective investors to get a quick estimate for the value of a business using a business valuation calculator. An owner would want a quick solution if there is an urgent need for money, whereas investors and prospective buyers would be interested in owning the company as fast as possible. During such times, it becomes easy to turn to an online business value calculator to speed up the estimation process. Though quick, online business value calculators will not give you the same benefits as licenced valuers. This is not the only drawback that comes with using an online business valuation calculator.
Why a Business Value Calculator might not be the Best Valuation Tool for Your Business
Using one means Making Numerous Assumptions
Whether the assumption is about the exact profits you made in the last year or that you have lost or gained no assets in that duration is inconsequential. The goal of a business valuation is usually to get the best estimate of the worth of a business. An online business value calculator forces you to make several assumptions and inadvertently skews your valuation results.
Lack of Detailed Analysis
This is a typical procedure for using a web-based business value calculator: a person logs onto the site and inputs a specific data point, usually profit or sales revenue. The calculator then predicts the worth of a business based on that financial data. The worth of an enterprise is not typically determined by its financial information alone. Factors such as goodwill and the brand name come into play. Using a business valuation calculator might yield accurate results as far as the financial side of the business is concerned, but not taking into account non-financial variables makes the estimation inaccurate.
In a similar vein, a business value calculator will not delineate the reasons for a given business valuation. It will only give you the end figures, leaving you to guess the reasons for that projection.
Valuation Calculators often yield Conflicting Results
Take an example of a coffee shop. The owner of this shop uses a business value calculator to estimate the worth of his business. On the one hand, he sees that his business is worth $100,000 based on projections from his sales revenue. However, by inputting his added profits and salary for the company in the same year, this owner receives the troubling news that his firm is only worth $80,000.
Discrepancies such as the one above are common when using business valuation calculators. Such differences in worth estimates make it difficult for relevant parties to know the true value of a business. This is especially dangerous when selling a business. For example, in the case above, if the owner decided to sell his coffee shop for $80,000, he could be underpricing it. On the other hand, buyers might reject the $100,000 asking price if they thought it was too high.
In conclusion, online valuation calculators are useful in estimating the worth of a business. Nevertheless, they are ineffective tools to use when conducting actual business valuations as they leave out too much information out of the valuation equation.
Mathieu Paul
Director – Business Improvement
P: +618 6315 2755
E: enquiries@wabusinessvaluations.com.au
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
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