If you are a small business owner, you have most certainly asked yourself “How much is my business worth?” Knowing the value of you business today will allow to make smarter, more informed business decisions in the near term. These decisions can then have a positive impact on your company valuation or stock price in the future when you are ready to exit the business or are planning to sell.
If you are like most business owners in America, you are not likely to know the true value or market capitalization of your company or what it would appraise for in today’s marketplace. You may believe you know how to value a small business or have some basic knowledge of business valuation methods. You may also be able to estimate future earnings or know how to use discounted cash flow. You may even be able to leverage multiples of earnings or know the value of comparable companies that allow you to arrive at an estimate of what a fair price might be. Numerous studies, however, indicate that the typical margin of error in these types of owner-driven exercises is between 25% and 50%!
A professional business valuation is likely to give you greater insight and a better understanding of your business than you have ever had before. In fact, a business appraisal is one of most important business based investments an owner can make. If you fall into any one of the following categories as a business owner and have not conducted a business valuation in the recent past, it is time to seriously consider hiring a business valuation professional to perform a small business appraisal:
- Actively seeking to sell your business
- Considering or planning to sell your business in the next 1-3 years
- Are engaging in active discussions with business brokers
- Selling the business is part of your long-term exit strategy, but you are currently in growth mode
- Planning to raise capital or apply for a business loan to expand business operations or increase your tangible assets
- Experienced significant changes (either positive or negative) in your overall business assets
- Are considering trying to become a public company at some point in the near future and are trying to estimate share price
Most business owners associate a business valuation with putting their business up for sale or for going through significant life events (divorce, death of a partner or owner, etc.). This is a fair association as today’s mergers & acquisition industry typically requires a business valuation be conducted before any transaction or business sale occurs. That said, though the sale of a business may be the most common time to conduct a third party, independent fair market valuation, savvy business owners are now using them to inform their strategic growth plans. These owners are using their business appraisals to identify value drivers in their current operations and optimizing the business around those levers to maximize earnings and future company value. Without that full understanding of the value of your business, you are essentially operating and directing the company with incomplete information.
In analyzing your existing business and future potential, there are some key elements that serve as indicators to a higher business valuation. Deloitte & Touche has identified the following characteristics as drivers of higher valuations for privately-held companies:
- Demonstrated growth history and strong potential for future growth
- Consistent yearly profits and positive profit growth trends
- Strong brand recognition
- Trademarked systems and/or applications
- Intellectual property and/or ownership of key intangible assets
- Established client base that is consistent and offers significant growth potential and revenue upside
- Strong balance sheet that demonstrates indicators of positive cash flow, healthy margins and valuable assets
- Niche expertise that minimizes current and future competitive threats and creates significant barriers to entry
- Experienced, proven management team with strong knowledge of current business operations and a strategic roadmap for future growth
If you are a business owner and your company or organization has in place a number of the value drivers described above and has not yet conducted a business valuation (or has not conducted one in the recent past), you are doing yourself and company a major disservice. Know your value. Know your business. Leverage the services of a certified business valuation specialist and use that as input to drive your performance and future value higher. Your future self will thank you.