4 Common Business-Valuation Mistakes Made by Photography Business Owners
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“There is no reason to place a value on my business until I’m ready to sell it.”
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“I know the photography business, so I have a good idea what my business is worth. A formal evaluation isn’t necessary.”
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“One of my competitors recently sold his photography business for three times its annual sales, which is a good indication of what mine is worth.”
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Mistake #4: “The growth of my business has always been stagnant; in fact, some years it has lost money. It can’t hold much value.”
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Several PhotographyTalk.com articles about starting and operating a successful photography business state that one of your primary goals, as a business owner, is to maximize the value of your business. You accomplish this goal by spending most of your time on high-value tasks instead of the mundane (but important) everyday tasks. Many business owners, including photographers, are prone to making four classic mistakes when determining the value of their business; and these could cause major problems if you make them too.
It’s true that the value of your business is what a prospective buyer will pay for it at the time of the sale, but you want to know and develop your business according to how a buyer would value it. You should understand what process he or she might use to determine the price he or she is willing to pay. With this understanding, you can make the right decisions today and into the future that maximizes its value.
As mentioned in a number of companion PhotographyTalk.com articles, you must also know the value of your business today as well as 10, 20 or 30 years from now, so you can prepare a realistic and accurate financial retirement plan. You may also find it necessary to sell your business prior to retirement to start a new business, fund a child or grandchild’s college education or because of other financial needs.
A regular re-examination of the value of your business provides a clear record of what a prospective buyer can expect after he or she assumes ownership. This is the kind of information that could influence him or her to want your business, and pay top dollar for it. Accountants will tell you that knowing the value of your business at any point in time could also provide you with tax advantages.
Just as shooting photographs that customers will purchase requires a professional (you), valuing your business accurately also requires the knowledge and experience of professionals in that field. There is no common method for determining the value of a small business. Different appraisers and brokers use different formulas. Their goal is to calculate a median value for your photography business within the industry. Your business’ value won’t be the exact median amount, but somewhere on the scale above or below the median. For example, in the auto parts industry, one study revealed that a parts business, with an annual revenue of $100,000, could be valued as low as $98,000 or as much as $830,000, or at any amount within that range.
An appraiser applies proven methods and takes into account factors that relate specifically to a photography business to make an accurate evaluation of the value of your business.
It’s quite unusual for two businesses of relatively equal size and competing in the same market to be worth the same. Often, the difference of just a few months between that sale and yours could have a significant influence on the value of your business. Seldom will two buyers purchase similar businesses for the same reasons. A simple change in interest rates, which neither you nor the buyer controls, could greatly affect the value of one business compared to another.
Three basic factors influence the value of your business: 1) how much cash it generates today; 2) the anticipated future growth in revenues; and 3) the return that a buyer must realize on his or her investment in your business.
Your photography business could be losing money on paper, but if you’re paying yourself a $100,000-annual salary and a bonus of another $100,000, then these dollars must come from the business’ revenues. To a business-valuation specialist or an accountant, these “hidden profits” that are shown as expenses on your profit & loss statement could actually make your business much more valuable to a buyer.
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