Why a Business Valuation is Important

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November 22, 2015
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Why a Business Valuation is Important

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Do you know what your business is worth? It’s a very important question but one that many business owners can’t answer. Business owners tend to only consider valuation when they decide to put their businesses up for sale, however it is essential for every business (regardless of size, growth stage or turnover) to have an up-to-date valuation every financial year.

Having a business valuation report on hand at all times will allow you to maximise investment opportunities, achieve financial security in retirement, make informed strategic decisions in your business and ensure a favourable outcome if you decide to sell.

Why every business should consider annual business valuations

1. Selling your Business

Knowing the true value of your business and how to increase earnings before interest and tax (EBIT) is crucial if you are eventually planning to sell. A business valuation will not only provide current market value but also an assessment of your business’ performance in multiple areas. You can use the valuation to set a strategic road map of development and improvement for your business. Implementing strategies each year to bridge the value gap will ensure the growth of EBIT & valuation multiples and you reach your desired business value by the time you plan to sell.

2. Attracting Investment

When opportunities for investment, private equity injection or strategic partnerships arise, decisions need to be made quickly. A business owner who understands the true value of their business is able to take full advantage of these opportunities and make informed decisions. A business valuation report covers your business’ history, legal structure, financial information and a range of other factors. An up-to-date valuation is like your business’ resume for potential investors. It provides a snapshot of your business performance in the current industry climate so annual valuations are essential if you are seeking investors.

3. Planning for Expansion

For business owners with plans for expansion, an up-to-date business valuation report is a critical tool. It provides an accurate industry benchmark for your business and can also make it easier to obtain funding from lenders and financial organisations. Regular business valuations ensure you can plan strategically and grow at the right time. They also highlight areas that require attention before your business can achieve the desired growth.

4. Approaching Retirement

Many business owners put their heart and soul (not to mention their life savings) into their business with a hope that one day it will provide them with a retirement nest egg. If you are basing your retirement on the eventual sale of your business, you need to be prepared. A business valuation will give you in-depth understanding of how much your business is worth now. You can then identify how much you need to generate from the sale of your business to be able to retire comfortably. Once you know what the gap is, you can put in place a strategy to increase your business value and ultimately achieve financial freedom.

5. Implementing an Exit Strategy

Every exit plan should align with the owner’s business and personal goals. The most successful exits from business require considerable planning. Annual business valuations create a ‘starting point’ for the planning process. Regardless of your chosen exit strategy (e.g IPO, MBO, merger/acquisition) you need to have accurate insight into the value of your share of the business. Regular business valuations will provide a clear picture of your business financial position at all times and achieve the best possible outcome when it is time to ‘exit’.

6. Future Proofing

Personal loss, divorce and legal disputes can sometimes be difficult topics to discuss but it’s important to have planning and asset protection in place for the future. If something happened to you, would your family be able to keep running the business? If they had to get your estate in order, would they know the value of your business? If you implement regular business valuations you will have an up-to-date financial record of your business assets. Similarly, up-to-date records can be beneficial in legal proceedings such as a divorce or an audit investigation with a Government Agency.

7. Insurance Cover

When taking out a buy/sell life insurance agreement, business partners purchase life insurance policies on the lives of each co-owner. In the event of one of the co-owners deaths, the other co-owners are paid a lump-sum benefit that is then paid to the deceased’s surviving family members. An up-to-date business valuation is vital for this agreement and would be requested by insurance companies as your family/estate will be paid your share of the business value upon your death.

Just like a medical checkup, business valuations should be conducted on a regular basis as business value can fluctuate depending on market conditions, competition and financial performance. Each business is unique and a business valuation will help diagnose whether that business is healthy or promoting unhealthy practices.

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