The economy of today makes it important for you to know the value of your business. Do you know your business worth and why regular company valuation is important? In this post, we explain some of the most important reasons, both financial and legal, for knowing the value of your company at every stage in business.
Why Perform a Company Valuation?
Having an accurate picture of the overall value of your company is important in many scenarios that arise in the course of a business's lifespan. Some of these occurrences include:
- Life insurance determination
- Marital/shareholder disputes
- Sale of business
- Buyout agreements
- Estate planning
- Accessing external funding sources
- Litigation purposes
- Determination of tax obligations
Importance of Business Valuation
Below we focus on a few specific events or processes during which knowing your business worth is helpful and may even save you money.
The valuation of your business will help you make plans for the future. When you understand your current position, you will be able to decide on the approaches that you will make for your future. Decisions that could be affected may include plans for hiring, expansion, new locations and your own retirement or exit strategy.
Departing Business Partners
When you and your partners form a business, you never expect that you will split. Nevertheless, business partners may decide to go their separate ways for any number of reasons. If you have valuations done on a regular basis, you and your partner(s) should have a clear view of the value owned by each and disputes can be minimized.
In addition, shareholders (if you have them) and investors will always be up to date with the monetary worth of their shares or investment.
When market valuation is done before a sale, you will be able to understand the position of your business. When the valuation is done well, it will give you an accurate price range that you can start negotiations on.
Additionally, it will be a reality check if your expectations are not in line with the current circumstances in the market. In certain instances, the valuation will provide you with a means of making decisions that will improve the value of the business to make future sales.
Ways to Boost the Value of Your Business
Business valuation is not just luck of the draw. There are many steps you can take to increase the value of your business currently and over time.
1) Avoid Relying on Just One Individual
If you are relying on one employee for success, it could have an impact on the potential of your business finances and possibly degrade the value. Have processes in place that could be executed by others, so a potential investor can envision the ways the business can continue to grow.
2) The Business Should Be Recognized as an Ideal Place of Work
Investors will be attracted to your business if turnover is low and employees are happy. Your business should strive to have a reputation of ability to deliver fairness and honesty. Providing access to employee development programs and ongoing training shows a commitment to employees, and customers as well.
3) Have Three Growth Markets Identified
To sell your business for a higher price, you need to show that your business will continue to grow. It's a good idea to adapt and be open to new technologies and ideally have three new markets identified where you see a potential for growth.
Methods for Company Valuation
There are many methods available for company valuation. Some are considered more reliable than others. The unsophisticated methods and antiquated formulas of the past do not give accurate valuations. The most common method in use today to determine the value of small businesses makes use of estimated rate of return (ROR). Companies or individuals that want to invest in your business will require the ROR analysis to determine if your business is a viable investment. The safest ROR is 20-year Treasury bond yield.
The revenue of your business is another other way to establish the worth of your business. In most cases, you will value the business as two times the revenue. However, the multiple will depend on the business you are in. If your adviser is diligent, he/she will help research the sales multiples of the industry you are in.
Additionally, you can also look at the value of the assets of your business. In some industries, a business will be worth roughly the cost of replacing your assets. The balance sheet can also help in valuation of the value of the assets of your business.
Analyzing the factors that determine the value of your business requires knowledge of the industry you are in and comparative values and benchmarks that have been achieved. The valuation of your business should be a reflection of the relevant market status as well as individual business circumstances.
Always consult your lawyers and financial advisers when beginning the process of determining business worth. These advisers will be able to guide you in the best process for valuation and will understand the worth of your company.
Having a documented and closely followed business success model can contribute to the market's view of your business. Improve your business plan with our roadmap for success, outlined in the free e-book below.
Image credit: Y. Samoilov