Whether selling your business or engaging in a transaction that requires a valuation, knowing what your company is worth will give you a competitive edge.
As a business owner, obtaining a business valuation, or appraisal of the company’s worth, is perhaps one of the most important things you can do to increase its future value. By going through the valuation process, you will come to understand the drivers that both positively and negatively impact value and you can make any necessary adjustments before it is too late.
There is a number of reasons why a business owner might want to obtain a business valuation, including:
- Prepare for an acquisition or sale
- Plan for retirement
- Succession planning
- Assist with estate planning/gift tax filings
- Buy out a shareholder
- Plan for a divorce
- Implement an Employee Stock Ownership Plan (ESOP)
- Sell shares of owner stock to management or implement a management buyout
- Implement an equity incentive plan for key managers
- Curiosity
“A valuation is at the heart of a range of business transactions and corporate decisions,” said Ken Serwinski, Managing Director of Prairie Capital Advisors. “Any strategic business decision requires a detailed company valuation.”
The process of obtaining a fair and accurate valuation is complicated and often fraught with assumptions and differences of opinion, which is why unbiased analysis from a reputable financial advisory company is necessary to ensure the value is based on real data and accurate projections, not emotion or opinion.
According to Serwinski, performing a business valuation is more of an art than a science because it is not only based on the company’s profitability, but also its efficiency, products, customer base, economic conditions, expected growth and a number of other factors.
The process of performing a business valuation begins with a detailed analysis of the company’s operations. There are two main approaches to pricing a business:
- Income valuation approach: Analyzes the company’s revenue, estimates its future economic returns and “converts” those returns into a value estimate.
- Market comparable approach: Determines the value of a company by comparing it to similar firms in the marketplace and creating valuation multiples, which are then adjusted against the earnings of the subject company.
How do you determine which approach best suits your company? It depends on your company’s level of uniqueness and stability in the marketplace. Companies with a distinctive business model, but who have detailed income projections, naturally lend themselves to the income valuation approach, while companies with similar organizational structures as businesses that have either been sold or whose stocks have active markets are better off using the market comparable approach. Most companies, however, utilize a combination of both approaches.
“Every company has some level of uniqueness, so we always attempt to exercise both approaches on every assignment,” said Serwinski. “It’s also important to consider the industry that the company operates in, how mature the company is and its risk levels.”
You’ll also need to take into account the general economic climate as well as trends in your industry – both good and bad. However, by working with a trusted financial advisor who is skilled at valuation, you will not only determine what your company is worth now, but also maximize its value in the future.