There are many reasons why business people seek a business valuation, including:
- Selling the business – to get an idea of a good price, you need to know what your business is worth. This is a leading motive for conducting a valuation. Even if you don’t plan to sell yet, valuing your business early on can help with succession planning in the future.
- Adding shareholders – getting a business valuation can determine share values.
- Upcoming merger or new investors – if a merger is on the table, everyone needs to do their due diligence. Your potential partners will be doing theirs, and you’ll need valuations on both your own business and theirs.
- Cash flow problems or financing for expansion – a bank or lending institution may sometimes carry out a business valuation as part of the loan-approval process.
Having your business assessed and valued is far more than just a box-ticking exercise, it is a complex process built on extensive data gathering, research and analysis of the business and the markets in which it operates. The information you glean from the valuation process can be vital to your future strategy. Here are some areas where a business valuation can provide clarity and perhaps get you focused more on the real question…
How can I increase the value of my business?
As opposed to…
How much is my business worth?
After all the value of a business is defined as its ability to generate (shareholder) income in to the future, the more income you generate means the more your business is worth!
Taking a stocktake of your assets
It’s easy to lose track of certain assets, but this could be costing you. For example, you might have depreciated assets that can be replaced – the Federal Government recently extended the instant asset tax write-off scheme for small and medium enterprises (SMEs).
You may also have assets that are uninsured or under-insured, or you may be wasting money insuring equipment that is now obsolete. We can provide information on where things stand with your assets, and discuss your options for moving forward.
Finding your company’s true value
Knowing how much your business is actually worth, and its resale value, may affect the decisions you make around selling, merging or expanding. You may have had an offer that sounded generous at the time, but turned out worse after a valuation. Gathering more information enables you to renegotiate from a stronger position.
Knowing your worth
In terms of what funding you can ask for and why, it helps if you already know where you stand financially. Banks want to know the risk you represent, and investors want to know where their money is going.
If you are fully prepared and have done your due diligence, you stand a much better chance of making headway with prospective investors. Knowing how much you need and what you need it for can increase your chances of success when seeking funding.
Even if you don’t have imminent plans to sell or seek funding, knowing what your business is worth can help you to be prepared when opportunities arise.
It also helps you prepare for the worst. In the case of a severe market downturn, for example, having a recent, reliable valuation provides clarity on the practical aspects of supplying and recovering assets, as well as your options for alternative methods of debt recovery.
Get into the habit of conducting regular business valuations. If you perform some kind of valuation on a yearly basis – even if it’s a limited analysis rather than a full appraisal – you can monitor how your business is tracking against market growth.
What to do after you’ve valued your business
If nothing else, a valuation will highlight your business’s strengths and weaknesses. This means you can develop a strategy to deal with any weak links, such as customer concentration, receivables turnover, cash flow and working capital, and leverage ratios.
It will also reveal what your value is based on: human capital, intellectual property, products and so on. Use this information to plan a roadmap for increasing value.
Business owners need to be aware of any internal problems and have a plan for addressing them before seeking capital.