The Importance of Valuing Your Business Now
Do you know what your business is worth? It’s not unusual for business owners to wait until they’re considering selling their business before trying to put a price on it. It shouldn’t be surprising then that business owners are often disappointed when they eventually appraise their business. However, if a valuation is done well before the sale of the business, there is ample time to take steps to increase its value.
There is both a science and an art to valuing a business, but ultimately, the value of a business is based on many factors that have little to do with the methods used to value the business.
The Science of Business Valuation
While several methods can be used to value a business, business valuation professionals (also referred to as certified valuation analysts) typically apply one of two methods as a starting point.
Income approach: Uses such factors as past, current, and projected cash flow, earnings, and revenues, and applies a multiplier to determine a base value. The multiplier varies depending on the type of business and the industry.
Asset approach: Focuses solely on the fair market value of the assets owned by the business, less its liabilities.
The Art of Business Valuation
While the science of business valuation is reasonably straightforward, there are typically variables and intangibles that must be considered. That’s where the art of business valuation comes in, which is often a subjective analysis of many factors, including the business’s employees, customer base, contractual arrangements, industry trends, market position, and environmental or regulatory issues. These are factors that, at any given time, can be perceived differently from one buyer to the next.
Depending on the type of business or its circumstances, some combination of methods may be applied. However, in many cases, the sale price or deal structure may be determined based on who is buying the business. For example, you are more likely to receive a higher price for your business if you sell it to a third-party buyer rather than a family member.
Don’t Wait to Value Your Business
Even if you’re not considering the sale of your business, there are several reasons why you should have your business valued sooner rather than later. For example, you can’t properly fund an estate or business continuation plan if you don’t know the value of your business. Also, if you seek capital from a lender or investor, you will need a business valuation; you will also have a better idea of the specific aspects of your business you need to improve to increase its value. At the very least, it gives you a critical benchmark that allows you to measure your progress.
Steps to Increase the Value of Your Business
By understanding the key factors that go into valuing your business, you can concentrate your efforts on improving aspects that will have the most immediate and visible impact on its value.
Increase Cash Flow
Cash flow is the most heavily weighted factor in determining the value of a business. Some quick ways to increase cash flow include:
- Work with a CPA or part-time CFO to review your books and operations for inefficiencies
- Partner with your bank’s cash management specialist to find ways to automate your payables and receivables
- Reduce staffing costs by outsourcing non-essential functions
Increase Revenue
Businesses with growing revenues have more value than businesses with flat revenues. Ways to increase revenue include:
- Increase customer incentives
- Update sales campaigns
- Implement an automated inbound marketing system
- Hire a business development specialist
Add Value
The way successful businesses increase their value is by adding value to everything they do for their customers by:
- Exceeding expectations
- Offering better quality
- Increasing convenience
- Providing superior customer service
- Rewarding customer loyalty
Improve Efficiency
Businesses with robust systems and repeatable processes typically have more efficient operations, leading to more substantial cash flows and higher profit margins.
