What is your business worth?
Business owners alike consider having a company valuation performed when he/she decides to sell their business. However, ideally, business owners should always have an up-to-date company valuation at your disposal and the management team should have an updated version at least once a year to safeguard against any unforeseen circumstances.
There are many reasons to have an up-to-date company valuation, here are 6 reasons for having one written up soon:
1. Selling of your business
Your business’ sale price depends on its worth when you put it on the market. It’s said that the true value of a business is always what someone is willing to pay for it. In the process of obtaining a fair market value, buyers will use various valuation methods, this is usually done to ensure that they’re not paying too much or set to obtain a negative ROI. The common methods for SME’s valuations are typically Discounted Cash Flow Valuation and Price-Earnings Ratio/Multiples. At the least, a company valuation can help make a statistically informed decision about whether to sell and what to set the sale price at.
2. Mergers and corporate restructure
When approaching additional investors to aid in company growth, the potential investor is going to request businesses current valuation, business plan and financial projections. Investors rely on knowledge that will let them know if an investment is going to provide them with a target positive ROI. The valuation of private shares is also a common occurrence, usually to settle shareholder disputes, when shareholders are seeking to exit the business, for inheritance and when seeking further investment. When seeking further investment from external investors, how much an investor should pay for a percentage/share of your business is determined by what the company is currently valued at.
In order to obtain a price to offer an investor in exchange to buy into your company, a company valuation is advised. While value can be set using various key metrics (e.g. multiple of earnings), a company valuation is generally preferred.
3. Succession planning
Business owners spend a lifetime building their businesses. When it comes to succession, they face the difficult decision of whether to sell, close, or pass down to the family. Passing down the business generally involves several issues, such as how to accurately divide the family business, allocate value, and navigate tax. If you own or co-own your business, you’ll probably have a buy-sell agreement legally set. This contract details who is allocated your interest after death and what will be paid out. A various number of methods are used to determine these numbers. A common method to rely on in some circumstances is an appraisal at the time of death to make this determination.
4. Value of company assets
When calculating your business’s asset value, it must include both tangible and intangible items related and in connection with the business. Tangible assets are those that are physical such as tools, equipment, and property. Intangible assets are items that can’t be touched but still hold value such as intellectual property and brands. The numbers gathered need to be gained from a valid valuation process so that business owners can acquire the right insurance, understand how much to reinvest into the business, and how much to sell the company for in order to make a profit.
5. Litigation and tax reason
Business owners tend to give back to a favourite charity using their business as the source of the funding/gift. Although you don’t have to be a publicly traded entity to do this, a company evaluation is generally required by law when the tax deduction exceeds a specified limit. An up-to-date company valuation will aid in avoiding any problems with the tax authorities at the end of the financial year by ensuring the business has an accurate, defensible and documented value.
6. Legal action
Company valuations arise in various types of litigation, from domestic relations to shareholder suits, from disputes over the sale of a business to taxation and estate litigation. In all such cases, the basic issue is the same—how much is the business or an ownership interest in it worth and how do you measure it. In an aspect of litigation, if your business is sued and loses, you may not be entitled by your insurance provider as to what the settlement is owed. Obtaining an appraisal for the business can help make these decisions, either selling interests to raise cash for the debt or closing the business entirely. A company valuation is also a common request during a marital dissolution. During the divorce process, many of the couple’s assets will have to be divided between the two parties through a process known as ‘equitable distribution’. A court will classify assets as either marital or separate, place a value on the asset, to then be distributed amongst the parties. It’s likely that the business will be a significant part of the asset settlement during a marital dissolution. Therefore, a company valuation will need to be performed and confirmed by both parties in order to distribute the assets equally.
Conclusion
It’s ideal for Small and Medium Enterprises to obtain an annual valuation in order to accurately measure any growth, losses, and understand where adjustments could be made to ensure a positive yearly outlook.