Company valuation

The importance of business valuations in small companies

Know your value today – decide your value tomorrow

A common misconception among entrepreneurs is the notion that you only need to know the value of your business once you are ready to sell. But ask yourself this: do you own all or a part of a business? Do you want to retire some day? Are you planning to grow? If you answered “yes” to any of these questions then you are definitely going to appreciate knowing the value of your business.

In many cases, however, business owners are too late in realizing the importance of valuing their business. This is especially common among small and medium-sized businesses. The impression that a valuation is complex, costly and very time consuming are some of the reasons why business owners tend to procrastinate completing a valuation. But, in starting too late, you will have little to no chance to increase the value of your company before a defining moment. Defining moments can be anything from seeking investment, to adding a new owner, to selling your company.

Where are you now, and which direction are you headed?

A business valuation will give you a pretty solid idea of how your company is doing today, but also an insight as to where you are headed. Knowing which areas need to be improved in order to increase value is an extremely valuable part of business valuation, but it’s often forgotten. Since many business owners conduct a business valuation at the exact time they need it, it leaves them with little to no room to actually improve the results. A valuation of your company could show which areas need to be improved, and can thus serve as the foundation for strategic decisions aiming to develop and improve your business.

Getting down to business

Traditionally, valuations are made in connection to a sale and/or purchase of a company. Nevertheless, there are other scenarios where a valuation is needed. If we put personal matters like divorce and retirement to one side, it still leaves us with several business situations where a valuation is essential. If your company is big enough, a listing on a stock exchange could be an option, meaning that it is of the utmost importance to set a price that the market believes is fair and thus accepts. If you need to report estate tax, or gift tax, a business valuation provides the value of your ownership and determines the amount of future payments.

Do you want a good price or a great price?

A valuation of your company can mean the difference between a good price and a great price. It could help set the floor and/or ceiling values for negotiating. By giving yourself enough time to improve your valuation results, the price tag during a sales process could significantly change. It is also worth mentioning that a business valuation is an incredible help during a negotiation, but it does not replace the negotiation itself. In an ideal situation, you are able to value your business each year to continuously track the development of your company’s value. This will enable you to see the effects of your value-creating actions. If you value your business, then you should know the value of your business!