For several reasons, most business owners get a business valuation at some point during the company’s life cycle: exit strategy planning, estate planning, litigation, funding, strategic planning, succession, establishing partner ownership in the event of exit or death of a partner, taxation, divorce proceedings, M&A deal, etc.
Whatever the reason, getting a professional business valuation done costs time and money. As a business owner, you must justify the expense. To do that, let’s see how a business valuation can benefit you and how you can get the most out of it.
What Is a Business Valuation?
Business valuation refers to the process of determining the current fair value of a business or company. In other words, if you were to take your company to market today, this is the prospective price buyers would be ready to pay it.
To calculate a realistic price, analysts assess the company’s assets, capital structure, management, prospective future earnings, and many other crucial factors.
Valuation analysts use different approaches to determine a company’s value. The selected approaches depend on the company’s unique business model, structure, industry, market conditions, and the purpose behind getting the valuation. Following are three commonly used business valuation approaches.
3 Popular Business Valuation Approaches
Cost approach. Also called the asset-based approach, the cost approach derives business value from its net asset value (total assets minus total liabilities). It best suits asset-intensive companies, holding entities, and distressed firms not worth more than their net tangible value.
Market approach. This approach derives the value of a business by analyzing the interests or selling prices of comparable companies. Valuation advisors identify similar, recent transactions of comparable businesses and develop pricing multiples to determine the target company’s value. This approach is suitable for public and private companies big enough to go public.
Income approach. The income approach bases a company’s value on generating future economic benefits. Valuation experts convert cash flows (future economic benefits) into present value to determine the company value. This approach is suitable for profitable, established businesses when reliable market data is difficult to find.
Every business has a unique set of risks and advantages, and there is no universal formula to derive business value. Hire professional business valuation advisors to know the right approach to determine your company’s value.
Benefits of a Business Valuation
A business valuation affords business owners benefits, such as:
- Greater knowledge of assets
- Current market value of your company
- Objective value of the business based on accurate analysis
- Access to more investors
- Better negotiating power.
Greater Knowledge of Your Assets
Most business owners have an estimate of their business assets. However, estimates are mere generalizations and far from accurate. Basing your companyâ€™s plans and goals on estimates risks losing out on time, money, and effort.
A business valuation gives you an accurate assessment of your assets. It helps you to know the present worth of your business, identify redundant assets, and determine any further course(s) of action.
Current Market Value of Your Company
Business owners tend to avoid thinking about their inevitable exit from the company until it occurs and usually have a high estimate of its value. That results in disappointment when the reality of their exit falls short of their expectations.
Our extensive experience working with exiting executives proves that a company’s current market value is almost always insufficient to meet the business owner’s exit goals. Therefore, you give yourself and your company time to meet those exit-time expectations by getting a business valuation early (preferably five to seven years before the exit date).
A business valuation identifies the strengths and weaknesses of your business and points out the areas to improve the salability of your company.
Objective Value of Your Business Based on Accurate Analysis
Business owners often estimate their businesses’ value based on gut feelings. In contrast, professional business valuation experts use complex scientific methods to calculate a company’s value based on the accurate analysis of available data and market conditions. This scientific rigor makes their analyses and calculations more reliable.
Access to More Investors
Before deciding to purchase or invest in a company, buyers assess its health, future potential, and expected return on investment. A professional business valuation report provides that information.
When you estimate value based on your gut feeling, prospective investors carry out a professional business valuation which reveals discrepancies between the figures. Those discrepancies result in a failed transaction.
If a professional business valuation shows a value below expectations, you have the chance to enhance the company’s value, then approach potential investors for funding or sale. This affords you greater access to more investors, as they may see how their funds will carry your business to the next level and increase its profitability.
Better Negotiating Power
When you know the accurate value of your company and can show it to potential investors, you get the confidence and power to defend it. You need not entertain people undermining your company’s value to increase profits.
How to Get the Most Out of Your Business Valuation
Understand the Need for Accuracy
Make sure you have a purpose for business valuation before undertaking the rigor and expense of having one performed. A business valuation forms the baseline for your future strategy, plans, and goals. A strategy based on inaccurate data may lead your company in the wrong direction and waste time, money, and effort. You might end up accepting a low selling price or wait for a better offer that may never come.
Even if you use periodic business valuations to help you with strategic planning, imagine the extent of time and money lost chasing unrealistic targets.
Ensure your business valuation is accurate by hiring experienced professional business valuation experts who use the tools suitable for your unique business, know the latest trends, and commit to providing accuracy.
Know Your Next Steps
What happens after the professional business valuation is performed? Either the value creation process begins, or you have confirmation that the company’s value is what you wanted!
If the current business value meets your expectations, you can advance your exit plans by taking your company to the market. If not, you need to work towards enhancing your business’ value.
To get the most out of your business valuation, work with experienced, professional advisors who will calculate your company’s accurate value and guide you through the next steps. Get in touch to learn more about Quantive’s valuation services.