Is It Time for a Business Valuation? What You Need to Know
May 21, 2020
If you own a business, there’s a good chance that you think a business valuation is only for businesses about to sell. But a valuation isn’t just a sticker price for your business — it can give you valuable insights into your competition, your assets, and your income. If a significant portion of your personal wealth is tied up in business, a valuation is a necessity, not an afterthought.
A good rule of thumb is to conduct a full business valuation every twelve months. That sounds like a lot, but a recent, up-to-date business valuation is an incredibly powerful tool for making both short- and long-term decisions. Here’s why.
Knowing Your Worth
Do you know how much your company is worth right now — and not just the market cap? If someone came to you with an offer to buy, out of the blue, would you know if the price were fair? What about the equipment, vehicles, or other assets you might have purchased? How much are they worth now? How much would they cost to replace?
These are all valid questions that you should be prepared to answer at any time, and an annual valuation gives you the hard data to do so. If you have to make decisions going forward about acquiring new assets, getting insurance coverage, or bringing in new investors, you’ll need to know what you’re already working with.
The same goes if you run into hard times. There may come a time when you’re short on cash and need to sell off some of your company’s assets or equity to bridge the gap. Without knowing what your assets are worth, you can’t get a fair price.
Preparing for a Merger or Acquisition
We mentioned this a couple of paragraphs ago, but you never know when someone might make an offer to buy your company. When they do, they’ll want to pay as little as they can. Having a certified, detailed, line-by-line itemization of the value of your company will ensure that you have the negotiating power you need not to be pushed around by unfair offers.
For an extreme cautionary tale about knowing your worth, look no further than tech giant Yahoo. In 1998, Yahoo had a chance to buy Google for $1 million. They turned it down. In 2002, realizing their mistake, they tried to buy Google for $3 billion. Google countered with $5 billion, and Yahoo turned it down again. In 2008, Yahoo had a buyout offer from Microsoft for $40 billion, which — you guessed it — they turned down. Finally, in 2016, Yahoo was sold to Verizon for $4.6 billion.
Obviously, there’s more to that story than simple business valuation, but this is part of what makes annual valuations so helpful — if you can show what your company is actually worth, you can negotiate accordingly.
Planning for the Future
If you don’t have a partnership agreement that addresses what happens in case a partner dies or retires, you should — things happen, and you can’t always see them coming. If the remaining partners are buying out the departing partner’s shares, they’ll need to know what they’re paying. If a deceased partner’s shares are being passed down to inheritors, the IRS will need to know what those shares are worth.
Keeping Detailed Books
We’re sure you’re keeping detailed and accurate finances on your whole business, whether you’re planning to sell or not. But oversights happen, you buy things and forget about them, and money slips through the cracks. Maybe you bought a subscription to a piece of software you don’t use anymore. Maybe you can find the same product cheaper from a different vendor. A full valuation will uncover every aspect of your cash flow so you can determine whether you’re using your money in the best possible way.
This isn’t the same as an audit. An audit is used to determine whether your finances are accurately reported, not to decide whether your money is well spent. Knowing how much you’re spending is one thing, but knowing the right amount to spend is entirely another.
Taking out the Guesswork
Valuation can be expensive — anywhere from thousands to tens of thousands of dollars. But the amount that it can save you in poorly negotiated sales, equity negotiations with investors, insurance premiums, and taxation makes it well worth your while.