In order to run your business effectively, you as a business owner should have a clear picture of your organisation’s financial health. Financial health goes past measuring company profits and outgoings since there could be hidden value in your business that you’re not currently aware or making use of.
A valuation of your business puts a concrete price tag on your company as a whole, indicating your company’s likelihood of success and opportunities for progression. A valuation can also help to identify areas where investment is going to waste. Company value can include an analysis of management, the market value of your assets or its capital structure.
What is a valuation?
In short, a valuation of your business is the price tag that you could sell it for. This company value is an assessment of the money you’re currently making, while incorporating the profit you’re likely to make in future. An understanding of your company value is particularly useful when you’re searching to secure additional funding for your company, or if you’re looking to sell it to investors. A formal valuation of your company indicates its sustainability, rather than focusing solely on your current profit as value.
There are a lot of factors that can affect the valuation of a business, including the situation leading to the assessment. A forced sale will significantly decrease the result of your business valuation, whereas a voluntary evaluation leaves you on good standing. Your staff are equally as important, as reliable and experienced employees and an effective management team assure that the business will flourish even without your input.
Arguably, your financial record is the most significant factor that could influence your valuation. If your business’ finances don’t add up correctly, any investor will suspect fraud and avoid your company entirely. Detailed records showing the level of debt you’re in, present and future cash-flow and profit projections all speak to a well-evidenced past, and your organisation seems more trustworthy straight away.
Intangible and tangible assets are also considered within a business valuation. Intangible assets can include your business’ growth potential, your trademarks and intellectual property, and your customer lifetime value. These assets play a hard-to-quantify but incredibly important role in your company’s overall value. Tangible assets include your business premises, equipment, stock, and the number of active clients you have. These tangible assets are easier to measure, but oftentimes less impactful unless your office space or machinery is incredibly expensive.
Why carry out a valuation?
A realistic estimate of your business value is vital for progression. To secure investors, you must provide some assurance that you’re reputable and likely to turn a profit. Your business is nothing but a financial opportunity to potential buyers, so quantifying your business values in terms of profit is essential. Also, a concrete price tag on your organisation provides guidance as to what sort of industry deals you could aim toward, and how much you can realistically ask your staff for shares in your company.
Identifying factors that are depleting the value of your business can be just as beneficial. Even if you aren’t looking to sell your organisation, realising your shortcomings after a valuation can help guide a repair strategy. Pinpointing and focusing on underperforming areas of your business assures that your successful ventures aren’t counteracted by a poor financial record, or unreliable staff.
Lastly, but most importantly, a realistic business valuation will help guide your annual financial goals, business strategies and marketing objectives. Your business could afford to and benefit from putting twice as much budget into marketing. Still, without a full and extensive assessment, you will feel your current strategy is performing well enough. Speed up your growth as much as possible by assessing where your budget is best spent, starting with a business valuation.
When do I carry out a valuation?
It’s worthwhile to calculate the value of your company annually. A new report is beneficial to guide annual business strategies, and twelve months allows for some market change. Try to time your valuations on the month that is most profitable for your business! For example, if you are a Christmas decoration provider, November to December will be the busiest time of year to measure. Different types of business valuation are best carried out at different times, too.
How do I carry out a valuation?
A business valuation can be carried out by yourself, or you can hire the services of an independent firm. There are also a number of different valuation methods you can choose from.
Asset valuation takes into consideration the value of your business’ tangible and intangible assets. The Net Book Value of your company is calculated by adding together your tangible and intangible assets, and then subtracting debt and outstanding credit from your total. For this approach, it’s a good idea to regularly maintain records of your assets so that their value takes inflation, depreciation and appreciation into consideration. With the possibility for fluctuation in asset value, this type of valuation can be performed more often than other types. Once every six months may work well.
Entry valuation bases its value of your business by how much it would cost to establish a similar business. In order to get an accurate estimate, you need a list detailing start-up costs, including securing office space, training employees, establishing a customer base, and developing products and services. Whatever your total comes to is the initial valuation of your business! This valuation method is best suited to incredibly new businesses without detailed records of profit, and it wouldn’t change quickly enough to need to be carried out more than once a year.
Another popular form of valuation is comparative analysis. Comparative analysis bases the value of your company on the price of rival companies that have been sold at a similar size. This valuation is the most simple, but it has its flaws. It doesn’t take into account your specific company assets, and it doesn’t necessarily track the competition of your market. You can perform this valuation several times a year, but it’s reliant on companies like yours being sold often.
Carrying out an annual valuation of your business is responsible in order to assess how your investments are growing and developing. Annual business strategies and marketing objectives can be much more ambitious with a concrete understanding of your company value, ultimately guiding you to make the right move at the right time. Even if the right move for your company is deciding to sell your business, you can determine a reasonable price tag with this article.