What is a business valuation and why would your company need one?
Long story short, a valuation of a business is in the best interest of all business owners. This is because it can help companies prepare ahead of time for specific events that may or may not be in their control.
Let’s take a look at what business valuation is, why it’s important, and what may be needed to start your business valuation.
What is a business valuation?
A business valuation, sometimes referred to as a business appraisal, is a process of determining how much a business is worth (which can take into consideration financial statements, future earnings, business assets, total liabilities, comparable companies, and more).
There are a variety of valuation methods, and each business valuator (or appraiser) will leverage a specific approach that depends on the reason behind the valuation request.
When seeking a business valuation, always ensure that you’re working with a business valuation expert that will deliver a certified business appraisal. Meet with and interview a variety of certified evaluators. This way, you can fully understand each person’s method of valuation (which expands to include processes, timelines, and costs), and you can make the decision that’s best for your business.
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Why do you need a business valuation?
There are many reasons to get a business valuation. But some of the most common reasons may include:
- Sell A Business: Anytime a business is sold, it needs a valuation. The valuation serves as a starting point for the negotiation process between the buyer and seller; it is important to know your business’s value before initiating any of these conversations
- Merge with Another Company: Similar to selling a business, merging with another company requires knowing the value of your business ahead of time
- Bring on Partners or Investors: Think Shark Tank and imagine if you had a certified business valuation before diving into the tank. You’d be much more prepared for the circling sharks!
- Benchmarking to the Industry: Know how you compare to your competitors. If you’re lagging behind them, you can work with experts in operations, finance, marketing, etc. to bring your business up to or beyond competitor levels.
- Taxes/Estate/Divorce: Certain events that occur will require a business valuation to be submitted in court proceedings, tax appraisal appeals, etc.
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What are the business valuation basics?
Business valuation firms will dig into the details of your company well beyond the financial metrics on your income statement and balance sheet.
Beyond financials, valuators will examine factors such as:
- Growth potential of the business: Do your 3-5 year plans justify growth of 2% or 20%?
- Dependence on any one employee, customer, or supplier: High dependence creates risk and will lower the valuation
- Recurring revenue: Think of this as your Netflix subscription. Revenue received monthly or regularly can increase the valuation.
- Customer satisfaction: Do you have customer satisfaction surveys that show highly satisfied customers over the long term? If yes, this can increase the valuation of your business.
- Differentiation from competitors: Are your products or services unique to those of your competitors? If they are, then you’re in a good position.
Does a business valuation require an expert?
Yes! You need a certified appraisal from a business valuation expert to ensure you have the most iron-clad valuation going into any negotiations (whether the intent is to sell, merge, partner, or get investments).
When you work with an expert business valuator, you’ll save time and money in the long run. To find a business valuation expert who can deliver a certified business appraisal, you can visit the American Society of Appraisers and search for a local appraiser.
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Ready to get started with your business valuation?
A business valuation is critical in a variety of situations – whether that situation is a result of a professional or personal event. Having your business appraised/valued ahead of any of these events is the best-case scenario. This way, you’ll be the one holding all the cards, and you won’t need to rush, cut corners, or sacrifice your goals in the process.
If you’re looking to get started in the business valuation process, we can help. At New Life CFO, we help companies of all sizes get their finances for an upcoming business valuation. Give us a call or reach out to us online to schedule a free consultation.