It is fast… but how reliable is a business calculator? There are pros and cons to using a business calculation software, with some situations more viable than others. If you’re contemplating using a business calculator, we encourage you to read this article to answer some of the questions you should be asking.
What is a business valuation calculator?
Business Valuation Calculator (software) provides an estimate of value relying on several variables and inputs. The software operates within a limited pre-determined set of calculations, based on a specific and limited number of input variables.
Business valuation success is determined by (amongst other things)
- The amount of inputs / information, both qualitative and quantitative that are given to the valuation professional or software, and the quality/accuracy of those inputs.
2. Ability to interpret those datapoints / information and assess their relevance and importance to the valuation of the subject business.
To point one above, valuations are completed based on the information provided (operating within a valuation framework), if there are more data points and a higher quality of data points, this enables the highest probability of a higher quality / accurate valuation.
To point two above, once you have that information, the valuation’s success is
- having the freedom to combine both the art and science of business valuations in identifying the relevant information and its importance,
2. having the valuation experience/knowledge that allows for again, the most robust / accurate valuation.
Why you should not trust a business calculator online
Using a software that has limited inputs and uses limited / confined mathematical formulas, will provide a limited valuation number.
Meaning a software will deliver a valuation based on the available information and pre-determined calculations, and depending on your valuation purpose, this may not be sufficient. For other purposes, a particular software may have enough (accurate) inputs, and a level of sophistication that produces a sufficiently justifiable valuation number.
But what would these purposes be? And how practical is that in real world situations. If you’re trying to sell your business for the highest price and a buyer is trying to buy it for the lowest price, is a potential buying going to accept / rely on a business valuation calculator for their due diligence on a sale price of $500,000?
Example of a business calculator
Business valuation purposes
An example could be that you are trying to buy a second hand car, and you go to a second hand car sales website. There is one picture, the name and make and year, with a price tag of $20,000. Now based on those inputs, $20,000 seems like an accurate price, your friend Bob said they’re worth about that much and you have seen a few others of the same make, model and year for a similar price. The photo of the car matches the other details and doesn’t seem damaged, so this seems to be an accurate valuation based on those limited inputs.
Now the car might very well be worth exactly $20,000 in the market, however, how justified is that number? Would you be wanting some more inputs of data/information to develop its valuation? Let’s add in the mechanic that took the car to their garage and performed an in-depth analysis of the engine, the body structure, interior and all the other parts, confirming based on the current condition of the car it had approximately 50,000kms use left, because indeed the car was in poor condition.
Now this mechanic can’t take the car for a test drive because that is outside of their job description, so you take the car for a test drive, got a feeling for it, felt the rattle in the acceleration and squeaky noise when braking which you didn’t know what that meant, just that it wasn’t good. Now, based on significantly more datapoints from the mechanic and your test drive, the car for similar characteristics in the market would be valued at $5,000 to $10,000.
If you have less datapoints, more restrictions in analysis because that is not part of the job, and less knowledge on what makes a car mechanically reliable, you are left to make decisions based on an insufficient level of information. Often leading to a less accurate valuation and potentially very costly.
Situations where we see business valuation calculators as a viable option;
- The software is robust, has a significant amount of data inputs and the operator of the inputs/software knows what they are doing.
• When the business is very consistent in revenue and profits, there is little change or volatility in all aspects of the business’ operations and finances.
• The purpose of the valuation is less important, where it does not need to be tested / reviewed by third parties, or relied on for compliance with tax authorities or litigation purposes.
Situations where we see business valuation calculators having issues delivering the valuation service;
- If the software is basic in nature, requiring minimal inputs and does not have the industry credibility.
• If the business is expecting its future to be different to its past, meaning is it expecting growth, or a decline? Or any material changes in operations.
• Is the valuation to be reviewed by a third party, be that a buyer, the tax department, used in a divorce or partnership dispute?
So you have to ask yourself, how accurate do I need the value of my business to be? how informed do I want to be? how justified do I want the value to be? what is my level of risk in this situation if it is not accurate? what is the reason I need this valuation? (am I going to buy the car and never use it, leaving it in the garage? Or do I need it everyday to get to and from work?)