Businesses need to create value for their clients, employees, suppliers, strategic partners, and investors throughout their life span. While most business owners engage in value creation with the help of growth plans and time-specific goals, rarely do they know their starting points (the current business value). In the absence of this essential information, they fail to achieve their goals.
Usually, their self-conducted estimates of current company value rely on gut feeling, point of view, and unknown bias. Such estimates ignore the critical step of a reality check and undermine the importance of a professional valuation.
This article takes a deep dive into the value a valuation provides you and your company.
What Is a Valuation?
A business valuation reveals how your company’s reputation, products, services, markets, and growth potential translate into dollars. Business valuation is an analytical process to determine the economic value of your company.
A valuation helps determine the value you, the business owner, would receive if you sold the company today (the current worth). However, valuations are not merely necessary when selling or acquiring a company.
Periodic valuations should form a part of your business strategy. Situations such as accidents, disability, a partner’s death, divorce, estate settlement, tax analysis, raising debt or equity, merger, etc., require a recent valuation of your company.
A business valuation provides a clear idea of your business’s current standing even without a triggering circumstance. Using that information, you can make better, more timely decisions. Incorporating this information into your business planning process enhances the efficiency of your business plans, strategies, and initiatives.
What Does a Valuation Provide?
A business valuation provides you with your company’s current market value (CMV). That is the value you would receive if you took your company to market today. However, this value will most likely not match your exit goals, which means there’s a gap you need to fill before you sell your business.
Even if you are not selling your business, you have goals for business growth. A valuation helps identify gaps in the potential value of your business. The value gap is the difference between the current value and the desired value of your business.
Most businesses have value gaps, and the owners do not recognize them. They usually overestimate the value of their company. A business valuation gives them the much-needed reality check backed by data and analysis.
How Does Valuation Provide Value?
With the data-driven business valuation results, you no longer have to guess where your company stands anymore. This realistic picture of the state of your company helps you make the right decisions to fill the value gap.
A valuation reveals areas where your company may lack in value. It identifies the skeletons in your closet and how they destroy your company’s value. These issues may include customer concentration, dependency on the business owner, inefficient operation, lack of documented processes, anomalies in accounting, fluctuating income, etc.
A valuation will help you determine which value drivers suit your unique business and effectively enhance your business value. Value drivers are the factors that help you accelerate value growth for your company.
You can improve the company value by diligently building the identified value drivers—and that is valuable itself.
A valuation also provides value by helping you to:
- Know your business assets correctly
- Improve access to investors
- Get better-negotiating power in an M&A transaction
- Set the stage for retirement
- Benchmark growth.
Know your business assets correctly. A valuation will provide you with specific numbers you can use to procure adequate insurance coverage for your assets. This exercise ultimately reduces the risk for your business in the event of a natural calamity that could damage your business assets.
Improve access to investors. A company valuation gives you access to more investors. Investors base their decisions on a company’s complete valuation report, which shows how it has grown, how it is likely to grow in the future, and the expected returns on investment.
Get better-negotiating power during an M&A transaction. Because you know the true market value of your business, you won’t fall for a low-balled offer from a big company seeking to merge or acquire your firm at the lowest price possible. Instead, you can negotiate to get the best price for your company.
Set the stage for retirement. A company valuation helps you understand your options and work better on your exit plan. It allows you to make informed and timely decisions about your company. By starting your exit planning a few years ahead of your retirement, you’ll have time to make necessary changes and create the structure so that you can retire smoothly.
Benchmark growth. A routine business valuation helps you know how far your company has grown within a specific period, its strengths and weaknesses, and the areas you should focus on to enhance growth.
Knowing Is Half the Battle
A valuation offers many benefits to you and your business. Its objectivity gives you clarity on the current state of your business and the accurate economic value of your company. It helps identify the value gaps and where your company may be falling short. The simple fact that it helps determine the accurate market worth of your business makes it valuable.
By increasing your company’s value, you can attain your growth goals, get your desired exit (both in terms of price and time), and have a comfortable retirement.