There are many reasons why you might want to know the value of your business. In case of a sale, for example, or a restructuring. The outcome of a valuation may be important, but the road leading up to it is much more relevant. This is because it brings out information that is of value in making the right strategic choices.
There are not so many natural times when you, as a business owner, have a valuation performed. It may be necessary in a legal proceeding, such as divorce or litigation. There may also be an accounting or business reason for it. In most cases, a business owner asks for a valuation when considering retiring. In that case, the valuation is performed based on available data.
The valuation is used solely to test expectations regarding the sale price. This is unfortunate, because by then it is often too late to apply the knowledge gained during the analysis. At a much earlier stage, a valuation is actually effective in making strategic choices. After all, good planning is necessary for growth.
Careful process
A valuation takes a broader look than just the financial parameters. We also look at the story behind your company's numbers. Is your business plan ready? We find out what stage your business is in. What is your company doing well, and what challenges are in your path? What is the quality of your customer base? Is your business dependent on certain suppliers?
Market position
It also involves looking outward. What is your market position relative to other companies? Does the margin match what you can expect in the industry? What are your competitors doing and what can you infer from that? Taking a critical look at your own figures and comparing figures and ratios of competitors gives a broad vision. Moreover, scenarios are calculated that give an insight into the value drivers of the company.
Many businesses focus on revenue growth: "growth is good. But often the value of the business is already increasing by a relatively small margin improvement, and a gross margin improvement is easier to achieve than a large sales jump. Going through scenarios based on the numbers often proves to be an eye-opener.
Getting ready to sell
A valuation as part of preparing a company for sale is preferably carried out two or three years in advance. With the results in your pocket, you as an entrepreneur can then take a number of measures well in advance of the business transfer. For example, it is wise to encourage independence within the organization, making the company less dependent on the DGA.
In addition, make sure you have a solid financial and commercial plan for the coming years. And focus on value-creating factors of your business, such as a stable revenue base with regular customers, multi-year contracts and a filled order pipeline. In a sales session, moreover, the income statement should be "clean. No private expenses should run through the company's figures. Management compensation and intercompany rent should be market-based.
The less you have to explain, the easier you will make the deal later. Excess equity is better distributed as dividends in the years leading up to the transaction. That way, the first part of the company's value has already been monetized.
