By Judy Mason, CPA, CVA, CEPA – Partner
It is a common question among business owners: “Why should I invest the time and go through the trouble of performing a business valuation if I am not currently considering selling my business?” Even if your intent right now is to maintain ownership and operation of the business, having an accurate gauge of your company’s value provides a multitude of valuable information that can enable you to make intelligent decisions about important issues.
A business valuation provides a baseline of value for your business at a specific point in time. Many business owners think they know what their business is worth; sometimes, expectations are reasonably accurate, but in other cases, they are misaligned with reality. An accurate business valuation will either confirm or challenge your expectations. If the value of your business ends up being below your expectations, knowing that now gives you time to plan for improving and growing the business to achieve the anticipated value. It also helps you to understand the key metrics that drive your company’s value. After all, you do not want to be underwhelmed by offers received when you decide to sell the business because your expectations are not in line with how buyers will view your business.
Strategic and Exit Planning
Part of what a business valuation offers is a true assessment of your company’s profitability and growth trends. This, in turn, can be used to help you develop a strategic plan or an exit strategy for your business. Developing a 3-, 5-, or 10-year plan will allow you to focus on areas of the business that will maximize your company’s value. Businesses are often part of your or your family’s estate. Understanding the business’ current value, as well as the path that your business is on, will help ensure you are on the right track for your estate planning.
Industry Comparison
The data and analyses of a business valuation include industry ratios and metrics that will help you determine how your business compares to similar companies in your industry. Having reliable industry data is important in assessing key performance indicators such as asset utilization, profitability, and use of leverage versus your competitors. This can help identify where your company is strong and where it can be improved and de-risked before a sale.
Benchmarking Progress
As mentioned earlier, a business valuation measures a company’s value at a specific point in time. If business valuations are performed regularly, you, as a business owner, have the intelligence and data necessary to measure the improvement in value from one time period to the next. You will also be able to assess the impact of the business improvement strategies implemented during that time frame. It creates accountability for strategic plans or exit strategies and allows you to track your progress concerning your goals.
Capital Investment
If you are considering expanding your business and seeking additional equity funding, a business valuation is an essential first step that is typically necessary when securing capital. Negotiating with new investors will often focus on value and the amount of ownership provided in exchange for the planned investment.
Life can be unpredictable. Events in and around your business can evolve quickly and change your reality. As a result, it can be crucial to establish a baseline valuation of your business from which you can determine a plan to grow effectively, regardless of your current disposition intentions. Valuations are an essential tool for assessing your company’s performance and setting a course for the future.
The valuation and management consulting team at MichaelSilver can assist with your valuation needs. We can also help with developing your strategic plan and structuring a succession plan. Contact us at 847.982.0333.