As a business owner, you spend a tremendous amount of time and energy building your business; as such, it is important that the value of your labor is reflected accurately during a business valuation.
Business valuations often serve as the “make or break” point for a company; while they are not always necessary for the day to day success of your business, valuations are an important tool for those considering an eventual exit.
The value of a business can change drastically in relatively short periods of time. This phenomenon is most often a result of various market conditions; for example, a company might see their value fluctuate based on market demand for their product, public opinion of celebrity or expert endorsers, or even technological advancements that could render a product line obsolete.
There are many different factors that play into a formal business valuation, taking the appropriate steps early on to ensure an accurate valuation will likely yield a higher return upon exit.
When is the Right Time for a Valuation?
There are myriads of situations in which a valuation might be necessary.
For example, when companies are seeking outside capital to assist in the growth of their business (i.e., a bank loan or bringing in an investor(s)); these types of entities will want a clear picture of the business prior to making any capital-related decisions.
A valuation is also necessary for companies who might be considering an IPO. A complete understanding of a business’ value will determine how much each party will receive or pay for their shares; conversely, an inaccurate valuation could lead to an unfair transaction.
Furthermore, valuations can be helpful for business owners who have no plans to sell their business but would like to be better prepared for the future of their organization and their own families.
What is Included in a Valuation?
In a 2009 Forbes article, Martin Zwilling, Founder/CEO of Startup Professionals, named three different valuation techniques:
– Asset valuation: this takes physical assets, intellectual property, employees, and customer relations into account to provide assets, intellectual property, employees, and customer relations into account to provide the “most concrete” value estimation.
– A market approach: this aims to determine the potential earning of a company based on demand and competition.
– Income valuation: this practice projects future cash flow and adds a discount to arrive at present value.
“Your best bet is an amalgam of all of them.”- Martin Zwilling
When it comes to impressing investors, the more ways you can speak their language the better. While valuations are not necessary for the day-to-day operations of a business, there are times when they are imperative.
NOW CFO can work alongside management to develop the most advantageous valuation model for your company.