An accurate valuation of your business is an essential tool for you as a business owner to assess both opportunities and opportunity costs as you plan for the future growth of your business and eventual transition. A business valuation provides either a point-in-time assessment of relative value or the price a buyer would be willing to spend on the business.
Despite the clear benefits of valuation, many business owners are hesitant to go through the process as it can exposes areas of weakness which may detract from the business's value. A valuation provides an overview of your strengths and weaknesses, and looking your weaknesses in the face can be daunting. No one wants to consider areas of vulnerability, but this is crucial to do.
A valuation provides an overview of your strengths and weaknesses.
What is a business valuation?
A business valuation is a process where the actual elements of your entity are measured alongside its competitive position within its sector, and its future financial expectations. This is necessary work because understanding your entity's value enables you to negotiate more effectively with potential buyers when you want to sell. Business valuation can also be used to determine taxation, establish partner ownership, and influence divorce proceedings for shareholders.
A business valuation might include an analysis of your entity's management, capital structure, future earnings prospects, or the market value of its assets.
Why is a business valuation important?
A valuation is important at any stage of your business because it prepares you for unexpected transaction triggering events. A transaction triggering event could be:
A shareholder or employee resigning
A shareholder or employee being fired
A shareholder retiring
A shareholder wishing to sell stock
A shareholder becoming disabled or dying
A shareholder getting divorced
Your entity going bankrupt
A valuation is important at any stage of your business because it prepares you for unexpected transaction triggering events.
Any of these events will transform your business and its trajectory in various ways. And, as these events are often unpredictable, it's important to be proactive about conducting a valuation, rather than reactive.
If you conduct a valuation before any of these events occurs, say annually, then all your shareholders will know and understand your business throughout its life-cycle and you will be better prepared for the future.
Uses of valuations
Valuations serve many different purposes. Read on for some of the most common uses of valuations:
Providing you with a baseline - an indication of what you're doing right and what you could work on. Without this baseline knowledge, you have no real, concrete evidence of how your business is doing. Knowing the value of your business will help you to identify operational inefficiencies and to create stronger cash flow, which means more value for your organization down the line.
Helping you chart the course for the future - pointing to areas that need some development or attention, and any shortfalls. If you perform this process regularly, you can use valuations as a measurement of your entity's progress over time. If you use these in tandem with your strategic business plan, you can start to see the ways in which you are meeting - or failing to meet - key objectives. Using key performance indicators (KPIs) as part of your valuation can help you identify gaps and problems.
Holding you accountable to your goals - a valuation provides a benchmark against which to compare future performance, and provides a perspective on price.
Providing a gateway to capital - if you are wanting to borrow capital for an acquisition or other business investment, it's in your best interest to have a recent valuation of your entity.
Arranging a fair settlement of ownership interest - a valuation can be useful in case of a shareholder or partnership dispute.
Determining a fair price for merging with another company - if you growth strategy includes buying or merging with another a company, a valuation will help you determine if the price you are being asked to pay is fair.
Determining the annual per share value of an employee stock ownership plan (ESOP) - ESOP is an employee benefit plan that gives workers ownership interest in the company which takes the form of shares of stock. When you know the value of your business, you can accurately determine the value of your employees' shares.
Litigation support - business valuations are crucial when it comes to litigation scenarios such as contract losses, divorce, embezzlement, executive compensation, partnership dissolution, SEC investigations, or shareholder disputes. In such cases, a comprehensive analysis of business value may be needed to reach a resolution.
Gift tax planning - the gift tax is a federal tax applied to an individual who is giving anything of value to another individual. A business valuation is useful in establishing gift tax, alongside estate tax.
Estate planning - the estate tax, sometimes referred to as the "death tax" is an excise tax paid by the deceased's estate on the fair market value of the net assets included in the deceased's estate on the date of death.
A valuation can be useful in case of a shareholder or partnership dispute.
How Syft can help
It's best to look at your most recently completed financial year when conducting a valuation. Syft's Valuation feature is a great starting point for providing you with an indicative value of your entity to support investor, partner, and acquisition conversations.
In Syft, once you’ve clicked on “Valuation” on the left menu bar, the indicative value of the entity is automatically displayed. You will be given the option to select the financial year or a period of 12 months that will run from the your chosen month. You can then name your valuation and click “Save Valuation”. This allows you to include the Valuation in other PDF report packs.
There are four methods that Syft Analytics uses to evaluate your business:
Revenue multiple - estimates value by applying a multiple to revenue
Profit multiple - estimates value by applying a multiple to profit
EBITDA multiple - estimates value by applying a multiple to EBITDA
Net asset value - estimates value by subtracting liabilities from assets
You can make adjustments to any of these methods according to an amount or an account by clicking on "Adjust".
For more information on the multiples used in Syft's valuations, read our article here.
Syft's Valuation feature is a great starting point for providing you with an indicative value of your entity.
For the multiples methods, Syft's team of experts has calculated each multiple based on your country, industry, and growth rate. However, this can also be altered by clicking on “Adjust” on the second line of the revenue, profit, and EBITDA tables.
Whether you are wanting to sell your business, attract investors, or deal with litigation issues, conducting a sound business valuation is crucial. But it doesn't have to be a complicated and time-consuming project. Thanks to software like Syft Analytics, conducting a business valuation has never been so simple.