Timing matters in business. It matters when hiring, investing, expanding and borrowing. It also matters when valuing a business. Many owners wait until a transaction is already approaching before asking what their business is worth. At that point, the valuation provides information. Obtaining one earlier can provide something equally important: options.
Problems are easier to fix when there is time
Imagine a valuation identifies that one customer represents a significant proportion of revenue. If the owner wants to sell next month, there may be very little that can realistically be done about it. If the owner is considering selling in three years, the situation looks very different.
There may be time to win additional customers and gradually reduce the concentration risk. The same applies to many common valuation issues. Owner dependency can potentially be reduced by building management capability. Poor documentation can be improved. Financial reporting can be cleaned up. Contracts can be reviewed. Recurring revenue can be strengthened. Operational responsibilities can be spread across the team.
None of these changes happens overnight. Time gives owners the ability to work on the factors that may eventually influence buyer confidence.
It can prevent unrealistic expectations
Selling a business is a significant financial and emotional decision. It becomes considerably more difficult when the owner’s expectation of value is far removed from the market.
An earlier valuation can help establish a realistic benchmark. If the result is lower than expected, the owner has time to understand why. They can then decide whether to improve the business, adjust their financial plans, delay a future sale or pursue another strategy.
Discovering the same information at the point of retirement provides considerably fewer choices.
It helps owners measure progress
A valuation can also become a useful management tool. If a business is valued today and again several years later, the owner can see whether changes in the business have translated into changes in value.
Perhaps revenue increased but customer concentration also increased. Perhaps profits remained relatively stable while recurring revenue improved substantially. Perhaps hiring a management team made the business less dependent on the owner.
A valuation allows those changes to be considered within the broader picture of business value rather than solely through revenue or profit.
It can improve succession planning
Not every business ultimately goes to an external buyer. Some are transferred to family members, employees, management teams or existing partners. A valuation can still be important.
Understanding the business’s value can assist discussions around ownership transfers, funding, shareholder arrangements and longer-term succession planning. Earlier information generally allows more time to structure those decisions properly.
There is rarely a perfect time to sell
Owners sometimes postpone valuation because they believe they will obtain one when the business is “ready.” The difficulty is that businesses are constantly changing. Markets move. Customers change. Employees leave. New competitors emerge. Technology evolves. Owner circumstances change.
Waiting for a perfect point can mean important planning decisions continue being made without a clear understanding of the owner’s largest asset.
A valuation does not require a sale to follow. It provides a clearer picture of where the business stands today. When owners understand that position earlier, they have more time to decide where they want the business to be tomorrow.
If you want to know more feel free to reach out. Contact us for personalised assistance and expert guidance.
Regards,
Tony Arena