Ways a Business Valuation Can Help Your Business
Imagine owning a stock portfolio and never checking in on its performance; you wouldn’t know where you stand, what’s performing, what is underperforming, and where you are with your goals. It’s the same thing when you own a business. Understanding the value of your company not only gives you a clear idea of what you’ve built, but regular valuations can help you manage and monitor the growth trajectory of your business.
You don’t have to be selling or seeking investment to benefit from an assessment of your company’s value. Here are some of the ways you can use your valuation to your advantage.
Reasons to value your business beyond selling
A proper business valuation gives you the economic value of your company in certain dollar terms that are easy to understand. If you already have a recent business valuation for a sale or merger, you’re in luck. That number can be used for so many other activities useful for today’s small business owner (SMB). Even if you haven’t considered selling, a business valuation can be useful for:
If you prefer to bring on a partner or someone to help run your company, a business valuation gives them a better idea of what they are committing to. It’s just one aspect of attracting a partner, but it can be an important one. Someone with the desire to join a company in a high-growth industry may look to the valuation to see that they are indeed taking on a worthwhile partnership.
While business valuations are most often used for companies seeking funds through traditional business loans, any type of funding may be more successful with a well-established business valuation. The value of a company can signal to investors how much return they may get; lenders will use a valuation to justify the loan to underwriters. Of all the reasons to consider a valuation, aside from a sale or acquisition, funding may have the most obvious return on investment (ROI).
Insurance is just part of running a business. From fire coverage to business interruption riders, the underwriters at the insurance company will want assurances that the assets and activities they are covering are honestly assessed. Take, for instance, what will happen if you lose machinery in a storm; the business valuation process will have taken the value of your physical assets into account. The same goes for a weather event that leaves your business closed for weeks. How much income did you lose? What type of payment can you expect? A business valuation will help answer those questions and help shape the level of coverage you should buy at the onset.
While your best bet is to let a CPA or professional tax expert handle your business returns and estimated quarterly payments, they will be better equipped to do their job with the numbers from your business valuation. Amortization and depreciation are two areas of tax law that need accurate values of your assets. Assessing those assets in the context of your overall business valuation can help amortize and depreciate them more efficiently and effectively. This has an impact on your total tax burden, it can also help you predict and manage your cash flow.
Finally, one of the best ways to help your business is to really understand how it’s doing. Unfortunately, most business owners are too close to their own creation to look at its health with an objective eye. A business valuation, performed by a third-party professional that knows what they are doing, can offer that unbiased assessment a wise SMB needs. Good or bad, the valuation paints a picture that can help the business owners understand what is going well and what needs to be changed. It may be the most useful reason to do a valuation today.
Types of funding
Raising cash may be one of the common reasons, besides a sale, to request a valuation. Here’s how each lender type might use a valuation:
Small Business Administration (SBA):
The SBA currently requires valuations from independent professionals for some of their higher-value loans that will be used to purchase another business or property, such as larger loan amounts under the SBA 7(a) or 504 loan program. A valuation will be required when:
- The finance amount minus the value of the real estate and/or equipment exceeds $250,000
- The buyer and seller have a close relationship
- The lender participating in the SBA loan program requires it
If you know that you’ll be working with the SBA for financing, inquire with them about what they need for a business valuation to meet their guidelines.
Lenders usually seek a valuation for determining how much to lend, what interest rates to charge, and the terms of a loan.
Those investors seeking to earn a portion of equity, a percentage of future sales, or other interests in the company will most certainly expect a business valuation to help them justify an offer.
(Note: Even companies using non-traditional funding tools, like crowdfunding platforms, can break through the noise with a proper valuation. When choosing between funding two companies in the same industry, the one with a clear record of valuations will be the obvious choice.)
Bottom line: How to value a business
While you could try to value the business yourself, there’s quite a bit of nuance in how a valuation is performed. Business valuation methods vary, with some companies preferring earnings multipliers, book value, discounted cash flow, or market cap (to name a few.) In fact, the actual business valuation formula might differ a bit based on how much information you have to include. Newer businesses with fewer assets and less capital might not need the same level of detail as a more established Fortune 500 company.
Instead of trying to figure out how to determine the valuation of a business, which is an art in itself, outsourcing may be one of the best things you can do. In addition to having that third-party impartiality mentioned above, you’ll be freed up to do better things. Ask how GrowGrade can take it off your hands so you can focus on what’s important.