Is there really a right time to conduct a business valuation? If so, when?
Being able to justify and support the value of the business is a pressing issue for business owners, particularly when they are looking to exit their business in the near future, dealing with a shareholder or matrimonial separation or undertaking tax/estate planning. Your retirement plans lean heavily on the outcome of your business valuation. This is why having a reasonable and supportable value for your business is key. Professional business valuation services address the complexity and credibility associated with arriving at a fair value.
Many business owners will arrive at an inflated and unjustified value for their business, which may create conflict and dispute and/or prolong their exit planning efforts.
What Events Necessitate a Valuation?
A business valuation is required for many reasons: tax/estate planning, exit planning, life insurance, matrimonial separation, shareholder buyout/dispute, sale of the business, financial reporting (e.g. purchase price allocation), employee stock ownership plans, etc.
Being able to support business value is of the utmost importance, which is why it is vital to involve a professional, credentialed valuation professional – one who will understand, appreciate and consider the relevant variables and issues when undertaking the valuation process.
When is the Right Time to Get a Valuation Done?
The timing for certain valuations may be dictated by a predetermined timeline such as the terms of a buy-sell clause or determined by the courts/legal system.
Although other circumstances may not dictate the timing of a valuation (e.g. tax/estate planning, exit/succession planning, life insurance needs, value enhancement initiative, etc.), it is never too early to conduct an independent valuation. Having your business independently valued on an annual or somewhat regular basis means you won’t have to scramble around at the last minute should unfortunate circumstances arise such as death, disability, divorce, departure and disagreement.
It is recommended that you have a valuation performed at least once every two years, given that your business is most likely the largest and most valuable asset in your portfolio.
How to Increase the Value of My Business?
To understand how to increase the value of your business, try to place yourself in the shoes of a potential buyer. Future cash flows are one of the main aspects of your business that buyers consider. They also consider the risks that could affect the generation of those future cash flows. In the buyer’s eye, the value of a business is impacted by many different factors. For example, having a solid management team and workforce in place helps to ensure the business will survive and thrive even when the former owner is no longer involved. Further, buyers who see a historical track record of growth and a strategic growth plan in place for continued future growth will be willing to pay a premium for your business.
Increasing your annual operating cash flow or net earnings will increase your business’ value. This can be accomplished through increasing revenues (e.g. volumes or prices), improving gross margins (e.g. decreasing input costs) and/or decreasing operating expenses and overheads where possible.
Further, decreasing the risk associated with being able to achieve the future annual operating cash flow or net earnings will also increase your business’ value. This can be achieved by decreasing the company’s dependence on the owner or a key customer, supplier or employee. You can also decrease risk by locking in future revenues and/or costs with long-term contracts. Business operations are dependent on the quality of its products/services, the management team and workforce in place and relationships with customers and suppliers. If these factors are constantly fluctuating, your business will be viewed as a riskier investment to a potential purchaser. In such cases, a higher rate of return will be required to entice potential buyers, implying that a lower valuation multiple will be offered.
Need Help Deciding the Right Time to Get a Valuation Done?
Why delay when the first consultation is absolutely free? Our team will be happy to assess your business’s unique requirements and conduct a timely business valuation. Call us at 905-305-VSPL (8775) to learn more.