Can I value a small business myself, or do I need a business valuator?

You may want to open a spreadsheet and try to value your own business before you speak to anyone. That is a sensible first step, and nothing stops you from doing it. The question is what the figure can safely be used for. A business valuation in Excel can be a useful way to understand your own numbers. It is a weaker basis for setting a price, answering a buyer’s offer or supporting a loan. This guide sets out where the do-it-yourself approach tends to slip, according to BDC, and when professional help is worth considering.

What you can reasonably do yourself

Gathering the inputs is work you can do on your own, and BDC says that when you hire a valuator you must be ready to share detailed information about the company. Pull together several years of financial statements, list what the business owns and owes, and note what you pay yourself and which expenses are personal. Then read how valuators work. BDC publishes free explanations of the methods, and the guide to what your business is worth covers the ground an owner needs first. The aim is an informed question, not a verdict. If you build a model, keep a clear record of each assumption, so that a valuator, a buyer or a lender can see what you relied on and challenge it.

Where do-it-yourself figures go wrong

BDC lists common valuation mistakes. Two matter most for a spreadsheet. The first is using a valuation method unsuited to the type of business or its level of returns or cash flow stability. The second is making unrealistic assumptions in cash flow or earnings projections. BDC also names failing to normalize earnings, using the book value of assets rather than fair market value, and ignoring changing sales trends. A spreadsheet will calculate whatever you type in. It cannot tell you that the method or the assumptions are wrong. The risk is false confidence: a tidy model with a precise-looking answer can feel more reliable than a rough one, even when the underlying choices are weak.

The statement from BDC

BDC puts it directly: mistakes often happen when entrepreneurs try to determine a company’s value without the help of a chartered business valuator. It also says that because of the complexity and stakes, it is helpful to hire a chartered business valuator to get an objective and realistic understanding of your company’s value, or to find out whether a buyer’s offer is reasonable. Note the word helpful. In some cases, BDC adds, a valuator may not even be needed: for smaller businesses or a sale to family members, an accountant experienced with business valuation may be able to give an adequate sense of a company’s worth.

Methods can disagree, even among professionals

A single spreadsheet may apply only one method. BDC explains that three main methods are frequently used, and that each may yield a different value. It adds that even different business valuators may not come up with the same figure. So the aim of professional help is not a magic number. It is a reasoned figure, with the method explained and the assumptions written down, which a buyer, a lender or a family member can test.

Different people hold different values

BDC says it is common for owners to have a different value in mind than potential buyers, family successors, financial partners or tax assessors. Your own estimate carries the owner’s view of the business, including its history and the effort that went into it. An outside party comes without that attachment. A valuator’s independence is part of what you are paying for. The CBV Institute describes the result of a CBV’s work as objective, well documented and built to withstand scrutiny in a negotiation or a courtroom. That describes what the profession aims for, not a guarantee about any one report.

• Use your own spreadsheet to organise the numbers and to form questions, not to set a price.
• Check whether your method suits the business: steady earnings, asset-heavy operations and poor returns can each call for something different.
• Test each projection against the last few years of actual results.
• Decide the purpose first, because a sale, a loan application and a family transfer can each call for a different kind of valuation.
• If a lender or buyer will rely on the figure, ask the professional what scope and standards the report follows.

If you decide to hire one

BDC says the fee will tend to vary with the size and complexity of the business, so ask for the scope and the cost before you start. It suggests asking your accountant, lawyer and others in your network for valuators they have worked with, and recommends someone who holds the Chartered Business Valuator designation. CBV Institute publishes practice standards and a code of ethics that govern its members. BDC says valuations can be done with varying levels of detail, each with a different cost and level of assurance, so ask which level the report will be. A related question is how to get a valuation before selling.