6 Surprising Benefits of a Company Valuation
Business owners often wait for a specific need to seek a company valuation. They may be ready to sell or raise capital, or a shareholder might be gifting equity to a family member or seeking to be bought out. A valuation can be valuable even if there is no immediate, specific need. Here are some big benefits that you might not have considered.
Planning for Retirement
You should seek a company valuation at least a few years prior to retiring from a business you own. A full valuation in anticipation of a sale or other transaction can help you better understand your options, and potentially even open up new options. Pre-retirement valuations are increasingly popular as Baby Boomers age. They want to explore their options, begin planning, and perhaps initiate the process of negotiating so that they know what retirement—and the business sale that accompanies it—will look like.
Planning for an Uncertain Future
You might not want to think about it, but the world is full of uncertainty, and a worst case scenario can wreck your business. Whether it’s the death of one of your co-owners, a vicious divorce, or a dispute between partners, a business valuation can arm you with information you need.
A valuation also offers your family some certainty if you suddenly die. Rather than wasting time on a valuation, your family can quickly decide what to do. Moreover, the value of your business can help you determine the right value for a life insurance policy, in addition to offering clear guidelines for the right business and other insurance values.
Shareholder agreements often contain provisions requiring regular valuations: this information helps owners and management keep up with the business’s changing value. This helps you assess how your business changes over time, and weigh how effectively various ownership strategies are functioning.
If you prefer to minimize costs and time, a valuation firm can annually calculate value based on predetermined procedures. This can be as simple as determining the current EBITDA multiple, then applying it to your business’s most recent EBIDTA stream. This helps owners see how the company is performing in light of market trends, but is a limited analysis, not a full appraisal.
Performing Better During Hard Times
No company is immune to market shifts. Understanding how these shifts can affect your company can insulate your business against the worst down swings. Businesses, for example, can be affected by the oil industry, even if they aren’t part of that industry. Some don’t want to know their value, for fear it will demoralize them. But this important information can help you capitalize on market swings. For example, down swings in the market are an ideal time to gift equity, thereby minimizing gift taxes.
No business wants to take a hard look at its weaknesses, but staring these weaknesses in the face can help you make intelligent business decisions. A valuation helps you assess risk and weigh performance. You’ll get a clear idea of the factors that drive value, offering you more control over your business’s value. AR turnover, customer concentration, leverage ratios, and working capital position can offer red flags to buyers, but may also undermine overall growth. A valuation alerts you to potential future problems, allowing you to avert catastrophe before you consider a sale.
Moving Beyond Gossip
We all hear gossip about other companies—and wonder why we can’t get the same values they do. A valuation expert looks at a company’s financial health and history to establish realistic sales numbers that are based neither on gossip or wishful thinking. Business owners contemplating an exit will find that a valuation can help them plan ahead.
A valuation firm ensures realistic expectations, helps you address possible weaknesses, and prevents your wishes from interfering with reality. Buyers always want to offer less than owners want. An independent appraisal by a business valuation expert helps both sides negotiate more reasonably. In so doing, both owners and buyers have a better chance of getting a fair deal that acknowledges a business’s strengths and shortcomings.