The importance of a business valuation

If someone were to ask you today, could you tell them what your business is worth? You may know your business is profitable. You may also know that the products or services you provide are meaningful to your clients. Yet, if someone asked you, could you confidently provide a quantitative answer?

Many business owners only have the emotional attachment they have with their business to judge how their businesses would be valued. They have gut feelings, or compare themselves with similar business that have recently sold. However, one thing is clear – failing to know what your business is worth right now can have negative consequences for the future of your business. These are a few of the reasons why knowing the value of your business is so important.

Growth planning
A business can drive its growth by knowing where it is at today and making plans on how to achieve its goals for tomorrow. While factors such as gross sales and cash flow play an important role in determining business value, they aren’t the only ones. For example, if your business’ yearly cash flow is around $5 million, and the equipment and property the business owns is worth $1 million, you might assume that the business’ value is around $6 million at the low end.

However, if the cash flow results from two or three big clients, potential buyers may value the business below $6 million due to the risk of large losses if one of those clients leaves following a sale. Likewise, if you, as the owner, are the primary reason for strong cash flows, a potential buyer may reduce their assessment of the business’ value to reflect the cost and risk associated with your eventual absence.

Knowing what your business is worth right now will help you determine which areas of your business to improve to pursue your growth goals. Awareness of these factors can get you thinking about and acting on strategies to potentially strengthen areas in your business, which can help guide your business toward the growth you desire.

Personal planning
Have you thought about what you want your life to look like after you retire? Without knowing what you currently have, it is difficult to create a plan that allows you to pursue what you need to achieve your future goals. Your post-retirement dreams should drive the direction your business should grow. Knowing what your business is worth today can focus your attention, allowing you to pursue important short-term and long-term goals.

Time for planning
Achieving business growth and can take years and many business owners severely underestimate how much time it takes. This lack of awareness can commonly lead to burnout, especially when owners view the challenge of spurring growth as insurmountable. Knowing what the business is worth now can prevent a lot challenges, because it helps you determine how long it may take to build the business to where you need it to be.

It’s important to understand the value of your business so you achieve the future you want. If you are interested in learning more about business valuations, or learning more about planning your business’ future, please reach out to Angela Marshall at Angela.Marshall@mcmcmg.com.