You’ve probably heard the term “business valuation” before. Putting a reasonable price tag to your business is necessary for your strategic plan. It reaps several benefits for you, as the business owner, regardless of whether you’re looking to sell or continue to maintain ownership. To take advantage of potential financial opportunities and avoid unknown legal liabilities, it makes commercial sense to conduct a valuation before selling your business.
In essence, what you will be doing is providing historical financial statements for an analysis of profitability and the nature of intangible value, if any. The valuation analysis will provide a range of value for your business and it will assist you in establishing a reasonable expectation of the key drivers that influence the value of your business.
Besides the obvious benefits of a business valuation, there are some that often fly under the radar. Here are 4 overlooked scenarios wherein a professional and third-party business valuation will benefit you tremendously.
Helps With Retirement Planning
The value of your business largely dictates the quality of your retired life, being that it is likely the largest asset in your portfolio. When you hire an expert to conduct a business valuation, you will be in a much better position to understand what the growth rate of your business needs to be in order to match your retirement plans. This is why it is important to carry out these valuations several years prior to your intended retirement date. Moreover, as a business owner, you must understand the key value drivers of your business, essentially those that affect the future cash flows.
To estimate these cash flows, one must predict (as accurately as possible!) the factors that may occur down the line to impact a company’s revenue generating ability. So what exactly are these factors, you might ask. Well, they are wide as they are varied – the brand’s strength, market trends, proprietary technology, trademarks and patents, independent board, arm’s length business transactions, qualified and experienced management team, trained workforce, customer & supplier relationships, etc. When strategically taken into consideration, these build future profitability and growth.
Tracks Growth and Sets Benchmarks
A huge advantage of having periodic independent business valuations is that you receive an updated understanding of how your business value has moved in response to shifting market trends over time. The long and short of it is that this information will aid you in measuring the efficacy of your ownership strategies. If you decide that minimizing time and costs is needed, a professional valuator will take certain predetermined procedures into consideration in order to calculate or estimate value. To put it simply, the valuator may determine your previously calculated revenue / EBITDA multiple to enterprise value and apply that to your company’s recent revenue / EBITDA to determine the current enterprise value with an assumption that no significant changes in business operations, market transactions, and market conditions have occurred since the previously determined valuation. Given the crucial implications of business valuations, it is not uncommon for them to be added as mandatory provisions in shareholder agreements.
Reveals Weak Spots
While no business owner is ecstatic to admit their business’s weak spots, confronting them is a necessary evil. Irrespective of whether or not there is an impeding sale, a valuation provides you with the awareness to make more intelligent business decisions. An expert valuation measures performance and assesses risks. You’ll gain a clear insight into those factors that drive value and how they can be used to control your business’s overall value. From a holistic approach, you and your management team will be able to create a plan that effectively addresses any weak links.
Potential buyers may view factors such as working capital position, accounts receivable turnover, leverage ratios and customer concentration as red flags. Not only that, these factors may well undermine the overall company value. A professional valuation highlights potential problems that may arise further down the line and hints at the measures that can be adopted to avert them.
Braces Your Business for Tough Times Ahead
Your business shouldn’t have to bear the brunt of market downswings. To avoid this, it is important to understand how shifting market trends can influence your company. This knowledge, in turn, helps you insulate your business to the best of your ability. While many business owners feel that they’d much rather not know the value of their business, lest it is demoralizing, it is this information that can help them capitalize on changing trends. For instance, in the case of a bear market, it may be wise to gift equity and reduce gift taxes. Moreover, there might be other unforeseen circumstances that arise such as the death of a partner or a contentious divorce or ongoing shareholder dispute or a potential management buy out. In such cases, it is always better to have undergone a valuation rather than scrambling at the last minute to gather all information needed to have one in place.
Don’t neglect the well-being of your business. Conducting a business valuation at the right time can make all the difference!
Hiring a professional and independent valuator ahead of time is a great way to access several benefits that would ordinarily be closed off to you. Call us at 905-305-VSPL (8775) and we will perform a valuation that positions your business for future profitability and growth!