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While the value of most publicly traded companies is well known, most privately owned companies’ value is unknown and potentially wildly inaccurate. Most business owners only seek a business valuation when there is an immediate need. But company valuations can be beneficial whether for your business at all times. Here are 6 overlooked benefits of a valuation.

Better Understand Your Current Business Asset Value

A business owner should obtain an accurate assessment of the business assets. Estimates are not acceptable as estimates often do not tell the full, real story.

By obtaining a more accurate financial figure for their company. Business owners better understand how much to reinvest into the business and how much it will potentially sell for.

This gives you more information about your business. It creates a baseline value for your company. You can see how far your company has come since its inception. You can understand how your company stacks up in the marketplace.

To Benchmark & Understand Potential for Business Growth

One of the classic sayings is business; if you are not growing, you are dying. Accurate business valuations tell you if you are growing and how fast you are growing. By measuring this data, you can quantify it more meaningfully.

Understanding your valuation will give insight into your company’s performance and assess future risk. A valuation will help your management team look at all the factors that drive value. The understanding can help you increase your margins and improve company value.

By knowing the value now, you can develop a plan to increase the value over time. For example, you find out your business is worth $750,000. To retire and live the life you want, you want it to be around 1 million dollars. By understanding the value today, you can plan better to increase the company’s value to achieve a higher selling price.

Retirement planning and Buy-Sell Agreements with Partners

Speaking of retirement. Their business is most small business owner’s greatest asset. Does it make sense not to understand what that business is worth clearly?

Often, a business owner does not contemplate selling their company until an event occurs. It is beneficial to start thinking about selling your company now, even if the time frame is 2 to 10 years from now.

Also, knowing the value will make buyouts easier if you have business partners. Buy-sell agreements can disrupt the company, particularly when that company is small. But you can make the transition smoother when you have a current business valuation. Having a valuation can help develop buy-sell agreements with partners. So If an owner becomes permanently injured or wants to retire, how the buyout will be funded along with other terms, reach a fair agreement can already be in place.

Preparing You for Sudden Life Changes

While you may not plan on selling or retiring for years, life unexpectedly changes. Death of a partner, death of a fellow owner, a contentious divorce — these are possibilities most business owners would rather not confront head-on. However, in the case of these life-changing events, it’s good to have valuation knowledge up front rather than all of a sudden needing to scramble to get an idea of value. Especially considering emotions can make talking about money very difficult.

A valuation can also ensure your family is protected should you pass away. For example, if the value of your business increases significantly, you may need to increase the payout on key person life insurance policies.

Privately held businesses’ value can be a significant source of disagreement during a divorce settlement. An independent business valuation can be used for preliminary settlement negotiations or trial purposes as part of expert witness testimony.

To Work With Lenders

Again, talking about sudden life changes. Just think about the volatility of the economy. Your business may hit a rough patch. You may need an extra financial push to grow. Maybe you are ready to acquire a new business.

Lenders often require a business valuation before signing off on a loan, depending on the size and type of business. Specialized businesses may face unique economic and market challenges, so values understandably shift. A business valuation helps the lender help you.

Banks may reduce your loan-to-value ratio if the state of your industry is uncertain or “shaky.”

You might need to produce more security. Getting a business valuation now with an M&A advisory team helps you when working with lenders.

Strategize for Future Acquisitions & Future planning

A business valuation helps a company determine its next move. Business owners finding themselves at a crossroads in growth or retirement can seek the assistance of experienced advisers to appraise the company and strategize for the future

A business valuation lets you know where you stand now and your company’s potential for growth, including developing strategies for future acquisitions. Make the proper adjustments to prepare to meet with lenders with your mergers and acquisitions team and develop your talent in the right direction.

Moreover, if part of your growth strategy includes buying other companies, a business valuation will help you determine if the price you are being asked to pay is reasonable.

Conclusion

We often hear, “So-and-so got X multiple, so why can’t we?” Every company is different. A valuation expert can look at the intricacies of a company’s financial health and history to figure out a realistic multiple to shoot for.” For business owners contemplating an exit, getting a valuation well ahead of time will help them plan and build out their case.

At the end of the day, owners always want more, and buyers always want less. A business valuation will give an owner a more realistic expectation of what the business will sell for.

On top of the actual estimate of business value, business valuation provides the business owner with a lot of additional information about the business, its operations, and its position in the marketplace. A valuation helps give a 10,000-foot view of your business.

Even if you have not considered selling your business or purchasing a business, it is never too early to start planning. The first step in that process is a business valuation, which we can explain and provide. We can also help identify ways to increase the value of your business moving forward.