Can entrepreneurs overvalue their businesses?

By Sullivan, Klocke, Evans & Goenawein, P.C. on April 24, 2020 • Firm News

Like many business owners, you likely feel a lot of pride in your business and feel your operation has a high value that would make it attractive to investors or perhaps a buyer if you want to sell your company. However, you might run the risk of overvaluing your business, as it is not uncommon for business owners to overestimate how much their operations are worth.

Business owners may not intend to overvalue their businesses. Nonetheless, not having a correct value can hamper your plans for your company. Forbes explains why business owners need an accurate valuation and the reasons that you could end up placing a higher value on your operation than you intend.

The importance of valuation

You want to have an accurate valuation of your business to handle different scenarios. If you wish to expand your business and need capital, you need to demonstrate to investors how much your business is currently worth. You might also plan on selling your business and need a proper value. If a divorce looms on the horizon, you might need to sell your business if your spouse has a claim to some of its assets.

The reasons for overvaluation

You might overvalue your business for a variety of reasons. You could focus so tightly on running your business that you do not conduct the proper research on the market. If you are new to entrepreneurship, you might not know the correct way to valuate your business, as valuation methods tend to vary according to industry.

People who run family businesses for a long stretch of time sometimes fall into the trap of overvaluing their companies. You might form an emotional attachment to your operation, which can inflate your perception of how well your business actually performs. Finding an objective party to take a look at your business may yield a more accurate value for your operation.

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