Some Common Why's of Business Valuations
The path of any business is complicated, a valuation helps owners chart the way.
The demands on a business owner are onerous and there is very little time left over for working on the business; let alone thinking about what your business is worth. Some of the concerns may be around the cost of the appraisal, the time involved to do the valuation or because a clear benefit is not visible, however consider some of the reasons below.
It’s estimated that as much as 90 percent of business owners don’t know the value of their biggest asset, their business. Business owners may not see the benefit in getting a business valuation until something happens, a triggering event but then it becomes too late to make any changes or adjustments that could maximize the business value.
1. My business is my retirement plan
It’s not unusual for business owners to see their business as the way to fund their retirement. But without knowing how much your business is worth how do you know how much you will have to retire on? A valuation provides an indication of how to plan for retirement. This gives a business owner time to build and grow the business if the value is not in line with what the business owner’s expectations.
2. Estate planning
If the business is a family owned business and is being left to one or some of the children how can you determine what is equal and fair for the other children? A valuation of the business will help the parents determine how much the business is really worth, and can help them decide what estate planning changes may be appropriate.
3. Key person planning
If you have an employee that you can see taking over the business eventually or buying into the business then a valuation can give you a starting point to provide them with financial incentives. Profit, sales and other annual measures may not reflect the real growth of the business. A valuation can provide a baseline for your business and form part of the financial incentives plan for the key person.
4. Value of the business is lower than expected
A lot of the time the valuation of the business does not came out at what the business owner expected. Sometimes it can be higher, but more often than not it’s lower than expected. Business owners tend to have an inflated view of the value of the business, as they are emotionally invested and lack perspective. They might have heard about other similar businesses being sold with high multipliers and often they think their business is even better so why can’t they get the same or even better? In reality, EVERY business is different and what appears similar from the outside my look very different on the inside.
5. Wake-up call
Sometimes a business owners needs a ‘wake-up call’ to refocus on the business rather than just working in the business. A business valuation allows business owners to have a clear explanation of the value of their business, their value drivers, risk factors and areas needing attention and the evidence to support the result. A valuation offers insights to help a business owner see where to refocus or change course. The data can guide strategic decisions, business development plans, and even assess whether the right people are in place to support long-term goals. During this process the business owner develops a new perspective on their business and helps identify areas they can improve that will yield a higher value of the business.
At Malahat Valuation Group, we value companies, their assets and equipment on a daily basis. Our advice has and continues to been consistent....start planning 3-5 years before you want or need to sell your business. It takes time to make changes that translate to the financial statements and higher valuations. Don't wait until its too late and you're stuck with a value far below expectations.
Malahat Valuation Group