Ask most business owners if they know what the value of their business is and they wont be able to tell you. Business owners believe that they only need to know the value of a business when it is time to buy or time to sell. This is simply not the case. Knowing the value of your business enables you to implement new strategies and then be able to monitor to see if they are working.
Having a business valuation report on hand at all times will allow you to maximise investment opportunities when they present themselves. It will also allow you to achieve financial security in retirement. Most importantly, a business valuation will allow you to make informed strategic decisions in your business.
Why every business should consider annual business valuations
1. Selling your Business
Knowing the true value of your business and how to increase earnings before interest and tax (EBIT) is crucial if you are eventually planning to sell. A business valuation will not only provide current market value but also provide an insight into those areas of the business that can be improved. You can use the valuation to set a road map of improvement for your business. Implementing strategies each year to bridge the value gap will ensure the growth of EBIT & valuation multiples and you reach your desired business value by the time you plan to sell.
2. Planning for Expansion
For business owners who want to grow their business, an up-to-date business valuation report is a critical tool. It provides a benchmark for your business as well as making it easier to obtain funding from lenders and financial organisations. Regular business valuations ensure you can plan strategically and grow at the right time. A business valuation also highlights areas that require attention before your business can achieve the desired growth.
3. Approaching Retirement
Many business owners put everything they have into their business with a hope that one day it will provide them with a worry free retirement. If you are basing your retirement on the eventual sale of your business, you need to be prepared. A business valuation will give you in-depth understanding of how much your business is worth now. You can then identify how much you need to generate from the sale of your business to be able to retire comfortably. Once you know what this difference is, you can put in place a strategy to increase your business value and ultimately achieve financial freedom.
4. Implementing an Exit Strategy
Every exit plan should align with the owner’s business and personal goals. The most successful exits from business require considerable planning. Annual business valuations create a ‘starting point’ for the planning process. You need to have accurate insight into the value of your share of the business. Regular business valuations will provide a clear picture of your business financial position at all times and achieve the best possible outcome when it is time to ‘exit’.
5. Future Proofing
Personal loss, divorce and legal disputes can sometimes be difficult topics to discuss but it’s important to have planning and asset protection in place for the future. If something happened to you, would your family be able to keep running the business? If they had to get your estate in order, would they know the value of your business? If you implement regular business valuations you will have an up-to-date financial record of your business assets. Similarly, up-to-date records can be beneficial in legal proceedings such as a divorce or an audit investigation with a Government Agency.
6. Insurance Cover
When taking out a buy/sell life insurance agreement, business partners purchase life insurance policies on the lives of each co-owner. In the event of one of the co-owners deaths, the other co-owners are paid a lump-sum benefit that is then paid to the deceased’s surviving family members. An up-to-date business valuation is vital for this agreement and would be requested by insurance companies as your family/estate will be paid your share of the business value upon your death.
Just like a medical checkup, business valuations should be conducted on a regular basis as business value can fluctuate depending on market conditions, competition and financial performance. Each business is unique and a business valuation will help diagnose whether that business is healthy or promoting unhealthy practices.
At Silvan Ridge Business Advisers, we often hear our clients say how much more they understand their business after working through the valuation process. We can identify the key growth factors and help business owners implement some simple but effective strategies that focus on increasing business value.