5 Benefits of a Business Valuation for any Owner
A business valuation is a tool owners can deploy for a variety of reasons. It is often thought of as only a tool for sale, but it can be much more. At its core, it provides valuable facts and figures and assesses the worth of a company based on factors such as financial data, market competition, asset values and income values to name a few.
The timing of a valuation can be triggered by a specific need such as succession planning, a need for financing, or investor assessment, to name a few. However, many owners choose to assess the value of their business on an annual basis or even more often.
Regardless of timing, valuations provide owners with information they would not otherwise have and often includes data all owners should have at their disposal. This information can be invaluable in informed decision making based on long term goals and can be utilized in obtaining outside resources if needed.
While the benefits are many, there are 5 primary reasons to consider completing a valuation:
- Complete Knowledge of Assets. This is a category where estimates or generalizations are not a suitable substitute. Assigning specific and accurate values to company assets can aid owners in obtaining proper insurance coverage, identifying the best ways to reinvest back into an entity, and show how much would need to be gained from a sale to ensure profitability.
- Identifying Company Resale Value. It is difficult to contemplate the sale of any asset without knowing its worth and a company is no exception. Inherently, a buyer will want to pay less and a seller will want to make more. Within that delta typically lies the true sales price. If both sides rely on assumptions rather than actual data the process can take longer than is needed and can result in an impasse. Using a formal valuation provides a common set of facts and also affords the seller the ability to increase the valuation overtime in preparation for a sale.
- Assessing True Value. A basic data search based on sales of similar companies is a good place to start. But an actual valuation is based on factors that can lie outside of norms or averages. Obtaining a true value is often the deciding factor in whether a business is sold and an estimate should not be relied upon as a basis for a decision of that consequence.
- Preparation for Opportunities. Opportunities presented by mergers and acquisitions can come at unexpected times. Industries can experience waves of consolidation, or the circumstance of a competitor, for example, can serve to compel these discussions. In order to have the ability to be considered, data based on assets, past growth and potential growth will both inform you as a potential seller and offer justification up front for a reasonable offer.
- Access to Capital. Seeking investors in order to gain resources to grow can become essential at one point or another in a business’ life cycle. Any conversation with an investor begins and ends with a full valuation report, and often a projection. Investors are focused on potential return and approaching the discussion without the needed data is often a nonstarter.
Embarking on a business valuation for the first time can seem daunting. But the benefits to the owner and the company far outweigh the time dedicated. Once a credible valuation is established, setting goals year over year is easier and can be done in a way that both improves the company and that is meaningful financially to the owner. Maintaining consistency in valuations can offer metrics and identify areas of potential growth whether you are considering a sale now or at some point in the future.
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