Why A Business Valuation Pays Off

Business valuation provides figures regarding the actual worth or value of a company in terms of market competition, asset values, and income values.

The following outlines several potential benefits of obtaining a valuation of your company.

Most companies have a general idea of what their business is worth.

Why Valuation Matters

Many business owners find themselves in at least one situation (or more often than not, several different situations) where having a valuation done for their company is beneficial or even statutorily required.

Business valuation benefits

The following outlines several potential benefits of obtaining a valuation of your company.

Decision-making support

Having an annual business valuation may be used as a benchmark to assess the performance of the business.

Regulatory and statutory needs

Many business owners find themselves in at least one situation (or more often than not, several different situations) where having a valuation done for their company is beneficial or even statutorily required.

Knowledge of Assets

First and foremost, it will give the company a better knowledge of its assets.

Asset valuation accuracy

It is important to obtain an accurate business valuation assessment because estimates are not always acceptable as they are simply generalizations.

Capital reinvestment planning

This will also help in knowing how much to reinvest into the company.

Pricing and sale readiness

It can also help indicate an appropriate selling price for the company.

Protecting the Value of the Business

Having a well-prepared and reported business valuation will highlight weaknesses in the business.

Risk mitigation & value protection

This provides the opportunity for business owners to mitigate these weaknesses and prevent further loss of value.

Threat identification

Also identified in the valuation process will be any threats to the business.

Proactive remediation

This will again provide an opportunity for the business owner to be proactive in combating those threats.

Enhancing the Performance of the Business

Having an annual business valuation may be used as a benchmark to assess the performance of the business.

Strategic plan execution

It will help to evaluate the business's execution of the corporate strategic plan and provide objective information to shareholders.

Management evaluation

This information can be used in evaluating management and help with making the appropriate changes.

Benchmarking & KPI accountability

A business valuation provides performance measurements and promotes accountability within the ranks. For additional perspective on performance measurement, see guidance from MIT Sloan Management Review.

Knowing Your Company's True Value

Most companies have a general idea of what their business is worth.

Beyond simple factors

They can base this upon simple data such as stock market value, total asset value, and company bank account balances.

Reputable valuation support

However, there is much more to business valuations than those simple factors. Having a reputable valuations company prepare your business valuation will ensure that correct figures are provided.

Buyer expectations

This information will show the company's income and valuation growth over the course of the previous five years. Potential buyers will want to see this information.

Understanding the Resale Value

Getting a business valuation provides an understanding of company resale value.

Pre-market timing

You must know its true value and should get this valuation far before putting the company on the market.

Value enhancement timeline

This will give you an opportunity to take more time to increase the company's value to achieve a higher selling price.

Negotiation readiness

Knowing your company's resale value is necessary for negotiations.

Buyer sophistication

Most of the time buyers are savvy investment professionals. They purchase businesses as a regular aspect of their line of work, so you need to be ready with the facts.

Mergers or Acquisitions

Should a merger or acquisition opportunity arise, you will be prepared to show them what the value of your company is as a whole, what its asset withholdings are, how it has grown, and how it can continue to grow.

M&A readiness & leverage

Companies may attempt to acquire your business or merge with it for as little money as possible. This will give you negotiation leverage to make sure that you are not undercut.

Enterprise value communication

You will be prepared to show them what the value of your company is as a whole, what its asset withholdings are, how it has grown, and how it can continue to grow.

Offer discipline

Reject the offer if they offer less than the value of your company and hopefully you can negotiate an agreement with the information you have.

In Preparation for Unsolicited Offers or Unforeseen Events

As a business owner, you may receive unsolicited offers for your business and not be prepared for it.

Market data reliability

You may not have a solid grasp of the value of the business. You may be relying on distorted market information, which involves vague details related to the terms of the transactions. This creates a false value of the business without the benefit of reliable market information and the availability of details surrounding the transactions.

Contingency triggers

An unforeseen event, such as the death or disability of a business owner, may occur. This may trigger a buy-sell agreement and the need to redeem or sell partial or full interests in the business.

Preparedness benefits

When a business has obtained a business valuation on a regular basis, they are better prepared for such circumstances. The expectations related to such scenarios are better managed, and consequently, better outcomes are realized.

Dispute avoidance

Having the valuation will help avoid any buy-sell disputes for private businesses that have multiple parties that hold equity.

Defining level of value

The appraiser can play a critical role in assisting legal counsel in defining the level of value during the establishment of the buy-sell agreement. That way, the appropriate level of value may be used, given the specific event that triggers the buy-sell agreement.

Bias reduction

Having an annual valuation sets a precedent for the value of the equity. When you have a single valuation that is prepared at the time a triggering event occurs, this is more susceptible to claims of bias.

Third Party Interest in Valuing the Business

Multiple parties will either explicitly or implicitly value your business whether or not the business owner chooses to engage a business appraiser of their own choosing.

Bank underwriting

The bank will use its own approach to valuing the business when a business owner seeks to secure a business loan.

Buyer assessment

Prospective buyers of your business will have their own assessment of the value of the business.

Lender processes

When these potential buyers seek to secure a loan, again the bank will use its own approach.

IRS considerations

Lastly, the Internal Revenue Service will have a vested interest in the valuation of the business if the business is sold or is left in a business owner's estate.

Common sense

Accordingly, being fully informed as to the value of the business through a business valuation is common sense.

Access to More Investors

An investor is going to want to see a full company valuation report.

Importance to investor outreach

So, if you are seeking additional investors, this is an important tool to have.

Funding projections

Providing them with a valuation projection based upon their provided funding is also a good idea.

Transparency and ROI

They like to see where their money is going and how they will get a return on the investment.

Next-level growth

A potential investor is more likely to proceed when they can see that their funds will carry the company to the next level, increase its value, and put more money back into their own products.

Assisting in the Development of Dividend Policy

Earnings of a business can be used to reinvest back into the business, pay down outstanding debt or distribute dividends to the owners.

Dividend impact

Dividends have a direct impact on the revenue of the private business interest.

Return determination

The business valuation is a critical input system to determine return on the business investment. For a refresher on return expectations, consider this Harvard Business Review discussion.

Prudent allocation

Once this information is determined, it will lead to prudent decisions on how to best utilize earnings.

Managing Tax Transactions Efficiently

To a private business, a well-documented business valuation is frequently an essential component of effective tax planning strategies.

Executive incentives

For example, characterizing income tax incentives to key executives as capital gains rather than ordinary income may be supported by tax planning structures that rely on sensible valuations.

Estate and gift planning

The commonly used technique of valuation of business interests on a small interest basis provides reduced estate and gift taxes when smaller interests are sold or transferred to family members. For more on how valuation intersects with taxes, see Tax Implications of Business Valuation.

Set Goals and Compare Over Time

Once you have obtained your business's valuation, set new goals to increase the company's value over the next year.

Year-over-year tracking

Compare each year's valuation to the last to measure growth, losses, and to evaluate where room for improvement is.

Owner insight

Having the knowledge of what every component of your business is worth is invaluable information for business owners to have.

Bottom Line

All of the above reinforces the proposal that a business owner is well served by having a business valuation prepared on a regular basis.

Decision confidence

It puts the business owner on a level playing field when having to make important decisions relative to their most important asset.