Many business owners associate valuations with one event: selling the business. That is understandable, but it overlooks one of the most useful purposes of a valuation. Knowing what a business is worth can help an owner make better decisions years before a sale is ever considered.
A valuation provides a point-in-time view of the business. It looks beyond revenue alone and considers profitability, risk, customer concentration, recurring income, management structure, systems, market conditions and a range of other factors that can influence what a buyer may ultimately be prepared to pay. For an owner, that information can be valuable whether a sale is planned next year, five years from now or not at all.
A valuation creates a benchmark
Without a benchmark, it can be difficult to know whether the decisions being made today are actually increasing the underlying value of the business. Revenue may be growing while margins are declining. Profit may be improving while the business becomes increasingly dependent on one major client. A business may appear stronger operationally while still relying heavily on the owner for every important relationship and decision.
A valuation can help identify those issues and establish a starting point. Once an owner understands where the business sits today, future decisions can be considered differently. Will hiring a senior manager reduce owner dependency? Will moving customers onto longer-term agreements improve revenue certainty? Will diversifying the customer base reduce risk? Will better documentation make the business easier to transfer? These are not simply operational questions. They can also be value questions.
It can highlight issues earlier
One of the greatest advantages of obtaining a valuation before it becomes necessary is time. If a valuation identifies an issue immediately before a business is placed on the market, the owner may have very limited opportunity to address it. If the same issue is identified several years earlier, there may be time to make meaningful improvements.
Customer concentration can potentially be reduced. Systems can be documented. Financial reporting can be improved. Responsibilities can be delegated. Recurring revenue can be strengthened. Contracts can be reviewed. Not every issue can be fixed quickly, which is one reason earlier visibility can be valuable.
Business value can affect personal planning
For many owners, the business represents a significant proportion of their personal wealth, yet it is often the asset they know the least about financially. Property owners generally have some understanding of what their property may be worth. Share investors can see market prices almost instantly. A privately owned business is different. Its value needs to be assessed based on its particular financial performance, structure, risks and market.
That becomes increasingly important when thinking about retirement, succession planning, estate planning or long-term financial goals. If an owner is relying on the eventual sale of the business to fund the next stage of life, having a realistic understanding of its potential value can be important well before that sale occurs.
Valuation is information, not a commitment to sell
Obtaining a valuation does not mean an owner has decided to sell. It simply provides information. Sometimes that information confirms that the business is progressing well. Sometimes it identifies opportunities to improve value. Occasionally it shows that an owner’s expectations and the market are further apart than anticipated.
All three outcomes can be useful. The earlier a business owner understands what is driving the value of their business, the more time they have to influence it. A valuation should not necessarily be the final step before selling. In many cases, it can be the beginning of better planning.
If you want to know more feel free to reach out. Contact us for personalised assistance and expert guidance.
Regards,
Tony Arena