What was the one big thing that helped one of my most recent clients close a sale at three times his projected EBITDA? A business valuation. If you’ve been on the fence about ordering a business valuation, these three reasons can show you why they’re totally worthwhile.
Business owners are often overwhelmed by the amount of work a business valuation requires. They wondered if it’s worth the time and the money. I always tell them the same thing: A business valuation is absolutely necessary, and might not require as much work as you think.
Misconceptions run rampant around business valuations. Many owners underestimate the complexity behind them, and try to appraise their company on their own. Others simply procrastinate because they don’t understand the Return On Investment.
These are just two of many misguided approaches when it comes to soliciting a business valuation. I want to clear the air. Here are three reasons that make business valuations worthwhile.
3 Reasons Why You Need a Business Valuation
1. An Accredited Business Valuation is Vital for Selling - Nobody is going to force you to order a valuation, but that doesn’t mean you should discount it - not if you want to sell your business. There are at least five reasons why you need an independent business valuation to sell your company. Here are two of the most important ones:
* Somebody else will conduct one anyway - There are times when the IRS or a bank may need to run a business valuation if you haven’t already done so. This might be the case if you’re selling or willing your business to your heirs.
Realize that while the process behind valuations is uniform, there is some subjectivity to it. If you leave the valuation up to a third party, you might not like the results.
* Your buyer’s valuation may produce questionable results - Odds are good that your buyer will order a valuation of your company, especially if you haven’t. Then, you risk the chance that their valuation will be geared towards their interests, which in most cases is a lower value.
Using an independent appraiser removes the subjectivity from the process, ensuring it’s a number you can trust.
2. An Accredited Business Valuation is Vital for Growing - A credible business valuation goes far beyond a selling tool. Revealing your company’s true value - though important - is just the beginning of what a valuation can do for you. Valuations can also provide you the following three nuggets of information to help you grow your business:
* Primary revenue sources - When your business is earning money and operations are running smooth, it’s easy to assume everything is functioning well.
However, a high revenue stream today doesn’t guarantee it will continue tomorrow. A valuation might reveal that your business depends primarily on one or two clients, for instance. The key here would be to concentrate on client diversification so growth is sustainable.
* Drivers of profitability - Cash flow largely determines your company’s value. A valuation will reveal your primary sources of profitability, which can help you formulate strategies to boost it.
You might be surprised at how much a simple change can increase profitability. A valuation might reveal that the product or service you’ve been focusing on isn’t as profitable as you thought. Placing your focus elsewhere could boost profitability in ways you never even realized.
* Where your company is at risk - Risk is the other main determinant of value next to cash flow. A valuation can reveal if your business is at risk due to overreliance on you (the owner), competition and staff structure.
Fixing these issues before putting your business on the market could create meaningful growth, increase your company’s lean operations, and generate excitement and profit.
3. Basic Valuations Aren’t as Overwhelming as You Think - Valuations can appear intimidating, overwhelming and expensive, but they don’t have to be. In most cases, a basic valuation - called a Calculation of Value - will provide you with sufficient information, while fitting in your budget and your schedule.
Although these valuations don’t provide the same level of detail as a more in-depth valuation, they reveal most of the same core elements, including: A financial analysis, an operational analysis, a market analysis, and a summary of applied valuation methods.
While this basic valuation (or any) does require a little work on your end, it’s absolutely worth it for the ROI.
A business valuation is a critical investment for success. It can take your business to the next level or help you close a great sale - all for less work and investment than you might realize. At the end of the day, a business valuation is absolutely worthwhile.