Do you know the value of your business?
March 5, 2021
Usually, business owners are deeply involved in daily operations growing a business and it is normal that they wait for a trigger to check the value of their company. Most common triggers that require a valuation are purposes related to estate, gift tax planning or a potential sale of the business. If you are a business owner that would like to know the value and tools to enhance your business value, this article is for you.
The big question is if it is worth the effort to value the company in other instances besides estate, gift tax planning or in a potential buyout. The answer to this question is a definite yes. A business valuation provides owners of small and medium-sized private companies many tools to answer the following business questions:
- What are my company’s budget and financial plans for short, medium and long-term? Since a business valuation is based upon the future cash flow of a company, it utilizes budgets and financial plans. This allows business owners to make projections, as well as to evaluate them according to the performance of the business. In addition, business owners will be able to cut costs and expenses in order to increase their companies’ profits.
- Can I enhance the value of my business through my business strategy? An interesting aspect of a business valuation is the review of macro-economic factors as well as specific business aspects that would make the company more valuable. That analysis become a valuable tool to gain great insight into the business and strengthen the competitive advantages. In addition, business owners will be able to perform scenario analysis, which is especially useful in challenging business environments such as the current economic and business situation derived from Covid-19.
- How good is the performance of my Company? Business owners usually base the performance of their businesses by evaluating sales growth, new markets and net earnings on a given year. This performance evaluation can also be enhanced with a business valuation to produce relevant and useful information such as:
a. Comparing rate of return to other businesses in the industry
A business valuation can provide a measurement of the required rate of return for the Company, which will serve business owners to assess whether their rates of return are higher or lower from what investors require in similar and comparable companies.
b. Are the earnings sustainable?
Earnings might be good for now but for long-term will they remain good? A business valuation can demonstrate whether the earnings of the Company are at an appropriate level that would enable the business to sustain its business model in the future.
c. Is management making good business decisions? A valuation will also enable the business owner to understand if the management team is making decisions to increase the value of the Company. It allows business owners to align management incentives and compensation.
- How valuable are my company’s intangible assets? Business valuation will allow owners and management to determine and separate the intangible assets such as trademarks, customer lists, patents, software developed, among others. Business owners can measure the contribution of each intangible asset to the overall Company’s financial results. This will enable business owners enhance those efforts in order to develop intangible assets that could become very valuable in the future.
- How long will it take to recover my investment? Is this business worth the effort and investment? Should I invest in this business? A business valuation not only provides business owners with a measurement to value their companies, but also reflects the number of years to recover their initial investments for existing and prospective business opportunities.Now you know that a valuation report can offer you insights and recommendations in three key aspects of your business:
– Assets – you will know the value of each asset and liability. This approach is mostly applicable for holding companies and for asset intensive companies such as real estate companies.
– Income – you will understand the level of cash flow and apply an appropriate rate of return. This is very applicable in operating companies and it becomes a useful tool for business owners to estimate the cash flow and profits.
– Market – you will identify and understand comparable companies in the market place. Through this approach, valuation analysts estimate an appropriate multiple.
At Abitos, PLLC we are equipped to assist business owners in assessing their business models and enhance their business decisions through our capabilities and experience in business valuations. Schedule a complimentary first consultation today.