There are two types of valuations: Formal and Ballpark
Formal Valuation
Anytime there is litigation, the IRS is involved, or you need a PRECISE number that can be defended—you must get a formal valuation from a certified professional valuator.
A certified professional valuator will typically spend 30 plus hours, can use dozens of potential analysis approaches and valuation data, then must follow accepted valuation standards with hundreds of steps.
Typically, this type of valuation costs about $5,000 or more, can take weeks to complete, and requires extensive data gathering from the business owner and the accountant.
Ballpark Valuation
A ballpark valuation is a way to estimate the value of your business, without going through the formal valuation process and expense.
Ballpark valuations are good when you do not NEED a formal valuation because it provides a reasonable estimate to get you in the RANGE.
This is very valuable when you need to:
- Understand how strong your business operations are compared to your peers
- See how your decisions are impacting your business value
- Raise new capital or obtain loans
- Change the structure of your company
- Sell all or part of your company
- Consider a company acquisition
- Plan a tax strategy
- Plan an exit strategy
- Develop an estate plan
- Purchase life or business insurance
- Consider legal action (divorce, etc.)
Finance or Market-Based Ballpark Valuation?
Among the existing Ballpark valuation web products, there are two general approaches: 1) Finance Based and 2) purely Market-based.
Finance Based
These products typically use a highly simplified financial analysis with a small handful of the hundreds of potential steps of a formal valuation.
Using a small subset of the formal valuation process can never provide the accuracy of a formal valuation—these products are not appropriate for things like the IRS, litigation, giving stock options, or anything else that would usually require a formal valuation.
Products based mainly on financial analyses:
- Are overly complicated and usually require 3 years of financial data
- Typically do a poor job at assessing the strengths or weaknesses of a company beyond the financial data
- Require someone to interpret the results since most business owners aren’t fluent in “financial-ese”
It really kills the simplicity of a Ballpark valuation if you can’t understand, interpret, or use the results.
Purely Market-Based
This approach was pioneered by and only available through ValuSource, the world’s leader in professional business valuation software for over 30 years.
This ENTIRE process is market-based, with ZERO complex, theoretical or confusing financial analysis. This leads to both a reasonable value as well as a report that can be understood by the business owner.
Online Business Valuation uses actual business sales and then adds other market-based factors that business buyers consider.
- Similar to the Multiple Listing Service (MLS)® used in real estate.
- Shows actual selling price & details from a list of over 40,000 sold businesses from ValuSource’s proprietary ValuSource Market Comps database.
- The single best indicator of what a business could sell for is what they have sold for!
