Don’t wait for the worst to happen. Continue to take the temperature of your business through your usual measurements, but don’t skip conducting an annual business valuation.
A business valuation tells you more than what you can hope to get for your business if and when you decide to sell. You will learn more about how its current performance affects its value. Knowing the value of your business at all times places you in a very strategic position to make smarter choices for your company’s growth.
A Business Valuation Is More Than a Snapshot
A business valuation can help you avoid the worst pitfalls in running your business in addition to preparing for mergers and acquisitions.Think of the valuation process like taking your temperature. It’s a health check up for your business. A business valuation gives you insight into the sustained profile of a company over time.
The valuation identifies areas of strengths and weaknesses in your company operations. It provides essential data and insights into measuring performance and how that affects your strategic planning. Knowing where you are helps you on your way forward and enhances the overall value of the business.
A Business Valuation Identifies Potential Value Loss
A weakness could be identified simply as an area where the business is not performing at its optimum potential. For example, operational costs could be reduced, workforce productivity increased, or the effectiveness of sales and marketing functions enhanced. A weakness could equally be an area where the company is losing value, perhaps through poorly managed inventories or customer attrition.
As well as identifying areas for improvement, the valuation process will help to determine what is driving value in your business, so that those areas can be emphasized and enhanced to unlock further growth and value.Value drivers can be defined as things that have a significant impact on the performance of your specific business. They can come in many forms such as cutting edge technology, brand recognition, human capital or customer diversity. A regular business valuation can help companies to monitor the health of its value drivers to ensure that they are operationally optimal.
A valuation also offers the opportunity to consider and manage your company’s risk profile. Valuation is not about determining what a company is worth in your hands, but instead its transferable value.
For small and medium-sized businesses, something which is regarded as a value driver by the business owner can represent risk to potential investors or even the business itself. For example, a company’s client base is often regarded as a value driver. It may have deep client relationships, which have taken years to cultivate. However, if 40 percent of a company’s revenue is derived from one client, or if the relationship exists purely with the business owner, then, from a valuation point of view, it represents as much risk as it does return. The more diverse a company’s client base, the more value it attracts. A diverse client base, even across industries, can help to protect a business and therefore enhance its value. By flagging these areas of”risk,” a business valuation process can help a company to minimize its risk profile and maximize its potential value.
Taking on debt can be a risk, but again, one that can be managed and minimized by knowing the true value of your business. This is because the value of the business determines the “cost” of the new capital. A company which is overvalued can over-leverage itself with debt, increasing its risk of failure. Valuation then can help companies to achieve an appropriate debt structure.
If you are considering having your business valued, there are some simple steps that you should follow to ensure the best possible valuation: Undertake a due diligence health check, maintain a healthy cashflows, address any financial irregularities that may exist in the business and have all the accounting records present and correct.
Having ensured that the business is in the best possible state pre-valuation, entrepreneurs may wish to inform themselves more broadly by talking to their financial advisor, getting advice from an accountant orM&A professional — mainly if the valuation is a step toward selling the business — and researching valuations of similar businesses.
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