Many business owners have an assumption that the money they make from selling their business will fund their retirement, yet, most do not perform a formal business valuation until it’s time to sell. Unfortunately, many of these owners come to learn the hard way that their businesses have not created the value they hoped for to reach their retirement goals. As a business owner, it is imperative to understand your business value at every development stage so that you can act when you still have time to increase the value of your business.
What are some benefits of knowing your business value?
- Enhance your business performance: Are the strategic goals that you have set being met? Is your business profitable? Business decisions should be driven by these metrics.
- Value of your business assets: A valuation will help you understand which assets are valuable as well as those you should focus on to increase future value. For example, you may want to invest in marketing campaigns to raise your brand awareness. Or you can evaluate if too much of your cash is tied up in inventory.
- Company resale value: This process should be started far before your business goes up for sale so that if needed, you can have the opportunity to increase value to achieve a higher sales price. In addition, if you are selling your business, you can strengthen your position when negotiating.
- Access to more investors: if you are seeking investors to fund growth, a formal business valuation is the first thing an investor will ask for. Once invested, how will the investor’s funds be utilized? What type of returns will the investment yield?
While there is not an exact science to determine a business’s value, below are a few methods to consider:
- Asset-based valuation: Tangible assets such as machinery, inventory, etc. are easy to calculate value simply by taking the book value and subtracting any liabilities. Intangible assets such as brand recognition, patents, trademarks, intellectual property are more complex in valuing but can have a tremendous amount of value and worth knowing the monetary value.
- Market value: Looking at sales price of similar businesses that have recently been sold.
- Earnings valuation: How profitable is your business? How much is the annual growth? Know your financial statements very well as potential buyers spend a lot of time combing through these
Knowing the value of your business is key when building your company strategy. As your business changes, so do its value. Constantly updating and monitoring your business value is important as it dictates whether the strategy at hand is effective or if it needs to be changed