A business valuation can help you grow in many ways. Some business owners delay the process, only waiting to do one when absolutely necessary, such as before a sale, a funding round, or an employee disbursement. However, there are benefits to proactively setting up a valuation for your company. A regular analysis of your company’s worth gives you handy numbers to use when doing everything from attracting funding to planning for growth. It also helps you understand the true picture of what you’ve built. After all, for most of us our business is our livelihood, our life’s work, and our nest egg all in one.
While getting the correct valuation is important, the timing matters, too. Here’s how to know if it’s the right time to value your business.
Reasons you might need to know the valuation
The purpose of getting a small business valuation is to know the economic or market value of your company. Here are some of the most common situations where getting a business valuation is critically important:
Selling the business
If you are looking to liquidate or simply transfer business ownership to another owner, you’ll need a business valuation to determine the asking price. In cases where someone makes you an unsolicited offer, and you hadn’t already thought of selling, a business valuation puts you in a position of strength, as you’ll know if an offer is good or bad.
Taking on a partner
Whether you always planned on bringing on a partner, or recently you decided to expand, having a solid business valuation can inform potential partners of what they are getting into. It’s a sign of transparency and will go a long way in fostering trust. Picking the correct business valuation formula makes sure everyone is on the same page. Having historical data shows your commitment to carefully cultivate your company, while also adding accuracy and legitimacy to your claims.
Requesting funds
Whether you apply for financing the old-fashioned way (through loans or mortgages), or you seek money through seed money and funding rounds, you’ll need a clear value to inform investors. Savvy investors will not only want to see your valuation but know how you came up with it. The process of a business valuation puts you through the paces to have all that info on hand when they ask.
Insuring your company
In the event something goes wrong, insurance is there to help you recoup some of the losses. A proper business valuation will tell you how much coverage to purchase and ensure that you’re fully insured if the worst happens. Insurance may be required by law or your industry best practices, so getting your insurance coverage right may be a prerequisite of staying in business.
Taxation reasons
Business taxes are complicated and time-consuming, and as your company grows, the tax details will get a bit more involved. Going through the process of valuing your business not only tells you what your company is worth, but it also requires your team to prepare many smaller financial reports that will certainly come in handy come tax time. The best business valuation methods can help your tax pro get accurate amortization and depreciation numbers. This can actually save you money on taxes in the long term!
Business analysis
What if you could put all your numbers into a business valuation calculator and know how your company was really doing? Even if you weren’t in a position to completely analyze your business and troubleshoot issues, the process of a business valuation will set you on the path to do just that. Seeing these numbers clearly laid out can give decision-makers and stakeholders the info they need to see just how the business is doing. If something needs to be changed, a business valuation can often shine the light on it for prompt correction.
When is the right time?
If any of the above reasons have come up, and you don’t already have a business valuation, putting it off isn’t a good idea. In these cases, the best time to do it is now.
If you don’t have anything urgent on the horizon, however, it can be hard to know when a valuation should occur. Questions you may ask before initiating a valuation may include:
• Will the data I get by the next fiscal quarter make my numbers better or worse?
• Is there enough time to wait until I have some debts paid or loans restructured?
• Is a seasonal sales boost expected soon?
• Do we expect cash flow to change drastically?
• What do we know about the economy and the value of assets in general? What will happen to overall market values over time?
For those seeking funding, business valuation is especially important. Getting a value before any funding could cause you to appear too small for certain growth. Getting a value after funding may give you an inflated or optimistic valuation, which could turn off investors. If there’s a sweet spot between them, time your business valuation to put your company in the best light possible.
You could also decide that a business valuation is best performed at the end of the year, when you’re already doing the bulk of the reporting that will be included. For those looking to save time and energy, this approach is a solid one.
Conclusion: How to determine the valuation of a business
Whether this will be your first business valuation or your fifth, the timing really does matter. More important than when you do it, however, is that you do it at all. You should always maintain a view of the true value of your business, as it can help with future planning. Running a company can be a delicate equilibrium, one made much easier when you know where you stand – for better or for worse.
You’ve come this far with your company; now it’s time to make sure your valuation truly represents all that you’ve done with it. While in many circumstances it’s beneficial or required to get a professionally accredited valuation, oftentimes starting with a directional but accurate digital valuation can help set the stage. Check out GrowGrade for a free, accurate and quick business valuation.
