Company valuations are essential to selling and buying businesses, financial planning, exit planning, and succession planning. But the valuation process can actually enhance the value of a business.
By getting a valuation of your business, you gain an understanding of your company's sustained profile over time. The more you understand your business on a forensic level, the more you can do to strengthen it. A valuation enables you to identify areas of strength and weakness, make more informed decisions, and ensure proper debt structure. It can shine a light on certain areas, such as where revenue can be improved and where expenses can be reduced, leading to better profitability and cash flow. You gain insights that can inform strategic planning. Additionally, the more you know, the less uncertainty you face, lowering your risk profile. These are all things that ultimately can boost the business's overall value.
The valuation process will help pinpoint what is driving value in your company, so that you can focus on it and unleash its full potential. Value drivers can come in many forms, such as innovation, brand recognition, proprietary technology, or customer base. A regular business valuation can act as a check-up for business owners—a way to oversee the health of the company’s value drivers to make sure they are optimized.
In addition to identifying value drivers, a valuation can identify weaknesses. It is important to note that weakness in a business isn’t limited to underperforming numbers. It could be that the company is falling short of potential, operating costs could be reduced, workforce productivity could be improved, or inventories could be managed better. Finding these shortcomings enables you to address them and turn them into value enhancers. A valuation also allows you to manage your company's risk profile. Remember, valuation is not merely what the company is worth under your ownership. It’s about its transferable value.
Sometimes the owner of a small or mid-size business will consider something a value driver, when it can actually represent a risk. For example, a company can have long-term client relationships that took years to develop. But if a large chunk of a company's revenue comes from one client, or if that relationship could go away in a change of ownership, then this considered a risk and would lower the valuation. The more diverse your base, the more valuable it is. The business valuation process can help you identify these types of risks and minimize them, so that you can maximize value.
Valuation can also help with debt structuring. Yes, taking on debt can be a risk, but it can be managed by knowing the accurate value of your business. This is because the value determines the cost of new capital, so a company that is overvalued can also become over-leveraged with debt.
Valuations are obviously an important business tool on many levels and as a business owner it is something you can use to your advantage. Fortunately, with today's technology, you can gather an initial understanding of what your business is worth online in just minutes.