The Importance of an Accurate Business Valuation

A number of M&A deaths are witnessed as a result of misconceptions such as:

1. The terms ‘price’ and ‘value’ are synonymous – False.

While determining the value of your business requires careful professional analysis of its industry and nature, price considers factors such as the financial strengths of your business, transaction structure, and vendor negotiations.

2. The value does not change with time – It does. Businesses go through constant transition.
Factors such as business structure, financial arrangements, economic and industry conditions, and product lines often impact a business’ health. Certain internal and external factors may affect prospects and result in change of value—either positive or negative.

3. There is a set formula – No, there are different principles.

Considering that each business is different from another, sticking to one formula could be a fool’s errand when it comes to deriving your company’s value. For a real deal, base your calculation on principles such as expected ROI that could further translate into EBITDA or EBOC.

There are many more such myths. To debunk these and determine a proper business value, the key is to gain the right knowledge.

To begin, you must know why you need to perform a valuation. Two of the major reasons:

1. You want to buy or sell a business where both parties are likely to benefit from each other
2. You want to find an investor for your business who could deliver the right value—not overpriced, not underpriced.

Other Reasons You Need a True Business Valuation

1. To inform decision-making

If you identify the right factors to determine the market value of your business, it can be a boon for you. Proper valuation enables you to make strategic decisions and gauge performance such that you can measure any change in business value over time.

Valuations provide you a holistic view of your business, triggering decisions that help increase your ROI. Not only do you save yourself from making mistakes and wrong decisions, but you also avoid the dire consequences that follow.

2. To craft an exit strategy

Valuations, when done correctly, offer you a baseline for your business. You get to know if you are going in the right direction, or you need to make any improvements and where. A baseline acts as evidence for how your business is performing. Since the overall value of your business keeps fluctuating from time to time, usually going down during market correction.

Performing valuations is like checking the temperature of your business. Creating a baseline especially helps when you seek to sell your business and need a plan to increase its profitability.

3. To raise capital

If you are looking for someone to invest in your business, you must determine its correct value first. Because investors need to see the company’s actual worth at a point in time according to the market value as well as its book value, before they could make an investment.

If you are looking to raise capital to make an acquisition, you should have a valuation that you could present to the lender. When it comes to generating capital, you must start with the valuation.

4. To identify how to best grant stock options

Generally, the value of a business represents around 50% of the owner’s personal net worth. Due to lack of knowledge of how the valuation impacts their personal finances, businesses often can’t figure out how to diversify the concentrated stock position. Granting stock options requires formal valuation work. Therefore, it’s imperative to know your business value before granting stock options.

5. To have fair opinions and support transactions

Planning mergers and acquisitions? You need valuation. In fact, it is inevitable if you are undertaking any corporate reorganization or planning taxes or legal contracts that require a proper valuation on your business interest.

When you evaluate all transactions from a clear financial perspective, you can make fair opinions. The advisor looks at factors including pricing and terms in comparison with similar companies. Thus, they can conclude that the transaction is fair.

6. To create an ESOP

For creating employee stock ownership plans (ESOPs), valuations are again important. Usually performed annually, it helps track the productivity, milestones, and profitability when you enter or exit from an ESOP.

For publicly traded companies, market value can help for ESOP. On the other hand, private companies need an appraisal (in the form of an investor) to identify what can be deducted to shares and what their employees can receive every year.

7. To better manage succession plans

You may consider transfer of ownership of your business to one of your family members for gifting or other purposes. In this case, you must know the actual value of your business at that point in time or on an ongoing basis.

You may also want to sell your business to a strategic industry buyer for which you must know its right value. A strategic buyer can use the revenue streams to bring increased profits and generate more cash as they can add specific overhead expenses.

Clearly, valuations can fulfill numerous purposes, ensuring lucrative results, better than what you would get with false or no valuation. If you use valuations properly, you know how your business is performing in and out. Utterly imperative insights indeed if you aim to fortify your business value and future-proof it!

Simplify Business Valuation

Determining a company’s valuation has historically been a subjective process that relies on qualitative methods. With Cyndx Valer, founders are now able to input their objective financial information and compare it against relevant market data – including comparable company multiples, expected returns for private and public companies, and long-term growth expectations – to determine a real-time value for their company. This results in a faster, more accurate valuation that is critical for capital raising or M&A decisions. This allows the owner to more thoughtfully engage in valuation discussions with the counterparty.