As a business owner, you’ve worked hard to get your company off the ground. You now have a stream of reputable clients, and your product or service has garnered positive attention. In the midst of such results, don’t forget to have a proper business valuation done. A good-quality valuation will tell you which methods are working and where you can improve, even if you’re doing well. More importantly, such a valuation tells you how much your business is worth and how to improve its value.
Business valuations can be complex and if done incorrectly can end up costing you hundreds of thousands if not millions. We perform business valuations for our clients for a number of different reasons; preparing for an exit, litigation support, employee stock ownership plans (ESOP), fundraising, bank financing and a number of other reasons.
How Valuation Works
A valuation summarizes your business’ worth in one number and is the price an investor would typically; it considers cash flow, plus current cash and debt owed. There are several ways to value a business, the three most common ways are:
- Asset Approach – At a basic level, the asset approach values a business based on its net amount of assets of value (NAV) minus it’s liabilities.
- Market Approach – This method uses sales of comparable businesses to determine a multiple for your business based on a number of different key financial factors.
- The Income Approach- This approach takes the future income to be generated and compares it with a a fixed return to determine the risk. This method uses discounting and capitalization to determine future income and risk in the current market.
Determining which type of valuation to use really depends on the type of business and the circumstance the valuation is being used for.
Valuations are More than Cash
While cash values are important, they are not the only reason to get a business valuation. Valuations show you whether you’re getting the results that you want. Good-quality valuations involve gathering not only financial data, but data related to management, decision-making, and other factors. When analyzed together, these factors tell you if your business is succeeding now and whether it can keep up that success in the future.
To get a snapshot of your results, conduct internal evaluations regularly. If you have several departments, ask your managers to take charge of evaluations. Managers should use top-quality performance metrics to determine which employees or departments are performing well, and why. Every employee, whether in management or at entry level, should be evaluated and asked for his or her opinion on what is working.
Internal evaluations are not monitoring. Monitoring simply ensures employees are doing as asked on a daily basis. In contrast, evaluations show which tasks actually benefit your business. They may reveal problems with morale, organization, or financials. When caught early, these problems often can be fixed without permanently damaging your cash flow and reputation.
After the Valuation
After a valuation, you can begin strategic planning. New business strategies should cover your cash flow and other financial factors, as well as changes like program modifications. Post-valuation is a perfect time to reassess goals and determine how to deal with under-performance.
If your valuation uncovers serious flaws, do not panic. They do not mean your business will fail. Actually, flaws are a chance to improve your strategies. Perhaps one of your products is not selling as it should, despite your efforts to keep up with trends. That product might only serve a small percentage of the target market; small changes could improve its sales.
If you have never done a business valuation, now is the best time to get started. Your business will come out stronger and garner more respect from investors and clients.