Do You Know What Your Business Is Worth? The Importance of a Valuation
By Ashley DeCress, CPA, CVA, Manager, Advisory Services
I know what you’re thinking…
“Why would I need a valuation if I am not actively trying to sell my business?
Even if you do not intend to sell right now, there are many reasons why having an accurate understanding of your company’s value can be incredibly useful and allow you to make informed decisions about important issues. While there are a variety of events that may require a valuation of your business to be performed (transfer of ownership via estate or gift, shareholder buyouts/disputes, etc.), there are benefits to having a business valuation performed for strategic planning purposes as well:
A valuation provides a baseline of value for your business as of a point in time. Many business owners have an expectation of what their business is worth – sometimes these expectations are reasonably accurate and other times they are way off base. Having a valuation performed will give you an accurate value that will either confirm or challenge your expectations. If the value of your business ends up being below your expectations, knowing that now gives you the time to work on improving the business to achieve the value you want, as well as an understanding of the key metrics that drive your company’s value. The last thing you want is to be underwhelmed by the offers received when it does come time to sell, because your expectations were not in line with how buyers will view your business.
Strategic / Exit Plan
A valuation will assess your company’s profitability and growth trends, which translate into value and can be used to help you develop a strategic plan or an exit strategy for your business. Developing a three-, five- or 10-year plan will allow you to focus on the areas that will maximize the value of your company. Businesses are often part of family estates, and knowing the current value, as well as the path that your business is on, will ensure you’re on the right track in your estate planning.
Comparison to the Industry
A valuation analysis will provide you with industry ratios and metrics that will allow you to determine how your business compares to similar businesses in your industry. Having reliable industry data is important in assessing key performance indicators (KPIs) such as your profitability, asset utilization, and leverage against your competitors. Such an analysis can help identify not only where your company is strong, but also where it can be improved and de-risked prior to a sale.
A valuation measures a company’s value at a point in time. If valuations are performed regularly, a business owner can measure the improvement in value from one time period to the next and assess the impact of business improvement strategies implemented during that time frame. This also creates accountability for strategic plans or exit strategies and allows you to track your progress in relation to your goals.
If you are considering expanding your business and looking for additional equity funding, a valuation is one of the first steps that is typically necessary when securing capital. The negotiation with the new investor(s) will often focus on value and the amount of ownership that will be provided in exchange for the planned investment.
As we all know, life is unpredictable. That is why it is important to establish a baseline valuation of your business from which you can determine a plan to effectively build, regardless of the intention to sell. Valuations are an essential tool that allow you to assess your company’s current performance and set a course for the future.