If you google “Business Valuation Calculator”, you’ll get a ton of results promising fast, easy business valuations for the very low price of “free”.
Well – kind of free. Chances are you will have to put in your email and then be put into an endless stream of marketing emails. How it typically works is you enter your financials, and then the calculator algorithm applies pricing multiples from “similar” companies to yours, and then voila: your company’s value.
Except, not really at all. Chances are that the value you get is wildly inaccurate and therefore functionally useless to you.
In this article, we discuss all the reasons that a Business Valuation Calculator might give flawed results and why you should think twice before basing any decisions off the number you get.
A One-Size-Fits-All Approach
With all the complexity of your business, a standard “one-size-fits-all” approach just won’t cut it. A simple algorithm cannot account for intangibles that affect your value, such as reputation or patents that might increase your sale price. It also misses key nuances like industry and economic trends and future growth potential. No automated program can possibly assess all these factors into the valuation process.
Missing Assets
A valuation calculator that relies on balance sheet information only misses other key information that affect your value. In a real business valuation, all assets and liabilities – even those not recorded on the balance sheet – are taken into consideration. For instance, liabilities such as pensions tied up in a labor union or excess assets your company owns like cars might not show up on your books but do affect your value.
Flawed Comparisons
When you use an online calculator, it is typically comparing the unadjusted financial info you put into the data from publicly traded companies. The issue being, if you are a relatively small company, anticipating your growth compared to large public companies isn’t a great comparison. An appropriate comparison would take into account size, market share, profitability, and more. A calculator doesn’t, and therefore the number you get is unlikely to be accurate.
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Online calculators are quick and easy, but what’s the point of even using one if you know the result is likely to be inaccurate?
Our advice is to stay away from the lure of online calculators and leave the valuation to the professionals. Unless, of course, you love getting inaccurate valuations and spammy marketing emails.
