Why you should know your business value
Posted by Northadvisory on October 26, 2020
Do you know what your business is worth? If you are like many other business owners, your answer is probably ‘no’.
It’s not unusual for someone to dedicate their time and energy to building a successful enterprise but actually have no idea of its true value.
But knowing the value of your business is powerful information that can help you make strategic business decisions and put you in a strong position when you want to embark on new projects.
Valuing a business is more than just the dollars in the bank… it includes all your physical assets and intangible elements such as customer loyalty and brand recognition. These all have significant worth and must be taken into account when determining business valuation.
There are many different reasons why you should know your business value. Today, we take a look at some of the most important.
Preparing for growth
If you want to grow your business, you need to have a clear picture of where you are right now. Having an accurate business valuation allows you to measure your growth and compare it to your industry benchmarks.
It can also highlight possible areas of improvement. Do you have enough equipment to facilitate growth? Are you dependent on key people within the business? Are your systems and processes efficient? Will your cash flow support your plans?
All of these points can be addressed and can help you prepare for the next stage of business development.
As a business owner, it’s crucial for you to be able to respond promptly when new opportunities present themselves. If you are in a position where a new strategic partnership is offered or a third party is seeking to invest in your business, you need to be able to make quick decisions.
Knowing the value of your business allows you to take advantage of these moments and be empowered to move forward without lengthy delays.
You don’t want to miss out on a potential investor because you don’t have enough information at hand to answer critical questions or provide them with correct financial figures.
There are various types of insurance that you might consider purchasing and the value of your business will directly impact the insurance premiums. As an example, if you wanted to take out buy/sell insurance or key person insurance, a business valuation is required in order to set the parameters of the policy.
Succession and exit strategy
You need to have a thorough understanding of your business valuation when you start to create a succession plan or formulate an exit strategy. Accurate insight into the overall value of your business – or if you are a co-owner, your share of the business – enables you to build a plan that ensures you achieve the results you desire.
It also helps you identify areas that you need to work on in the lead up to your departure from the business.
If you calculate that you need a certain financial outcome from your exit, but the current business value doesn’t reflect that amount, then you can put strategies in place that help to increase the value accordingly.
Planning to sell
When you are preparing to sell your business, it is imperative that you know its value. What a prospective buyer is willing to pay versus the price you want to sell at can vary greatly. It’s likely you will need to provide supporting evidence to qualify your asking amount.
Having all your business documentation up to date is crucial, and you should also have some knowledge of current market conditions. How does your business compare to others? Is your performance above average? Can you do anything in the lead up to a sale to maximise the value? You should start thinking about these questions well before you start the process of going to market, because you want to maximise the outcome from your business sale.
Closer to retirement
If you are relying on the sale of your business to fund your retirement, you need to be well prepared. Similar to the two previous points, knowing your business value helps you understand your current position and what you need to do to make sure you achieve an optimal sale result. It’s an essential step in securing your financial future.
Seek professional advice
The value of your business can be complicated to quantify. As outlined, you need to consider a number of different factors, including your business’s financial position, tangible assets and the goodwill developed with customers.
There are various methods you can use to calculate your business value, but they can be complex. We recommend discussing each option with a professional accountant to select the most appropriate for your business.