“Online” Valuation Tools – the benefits and the dangers

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It is possible to sit down at your computer and find an “online” facility that will produce a “business valuation”. Such an option seems like an attractive way to determine the value for a business. It’s quick, it’s cheap, and it’s confidential.

When a business owner wants to have a quick idea of what the business might be worth, such a tool may provide a good guide, but it also may be completely misleading….. and that is the real problem with such a tool. It is only a guide at best. At worst it will be wrong, and may lead to a business owner feeling that their business is worth a lot more (or a lot less) than it is really worth.

Usually these online tools rely upon the user inputting a figure for profit, then answering a few questions on the business (to assess risk), and then when the button is pushed. Voila!!! The business value is produced. It is that easy.

Just like anything else in life – you get what you pay for, and if it looks simple – it’s probably wrong.

As an example. When you enter a profit figure, there can be a great disparity between the “real” profit, and the “theoretical” profit. Which number you enter will have a large impact on the result. This is one of many variables that can contribute to the production of an inaccurate result. There are many other inputs which can produce an erroneous report.

The people that have used these ‘tools’ will tell you that they have Disclaimers written all over them. Here is one example “Disclaimer: This tool should only be used as a general indicator of value. There are other factors associated with the sale of a business that can impact the value of a business that only an experienced broker will be able to identify. Please contact us for a more personal evaluation of your business and for suggestions on how to prepare your business for the highest sale possible.”

They are all similar. How about this one? “This business valuation calculator is designed as a research tool only to provide small business owners with a free and confidential instant business valuation result that can be used to help determine an approximate asking or sales price when valuing a small business for sale. This business valuation calculator is designed as a self-help research tool for independent uses only. All calculation results are hypothetical and for example purposes only. Note: This calculator is not intended to provide investment advice, or provide a firm business valuation, or replace an independent business appraisal provided by a qualified and professional valuation expert, Business Appraiser or Business Broker . Disclaimer You can also request a free and confidential preliminary business valuation consultation here from a professional.”

The worrying thing is that most of these ‘tools’ are really only being used to pick up clients. They are really just a marketing tool used to lure business owners into talking to their company. There is a hidden agenda. You can see it in the wording of these example disclaimers where they ask for you to contact the company.

Nearly all of these tools ask for an email address and contact details so that they can follow up in a few days to try and get the user to talk about having a proper valuation report completed. Which really is the only way to properly value a business.

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