Max it for the future
When do business owners need to know the value of their business? The obvious answer is before they sell it, or when events require a valuation. The less apparent answer is whenever they want to grow their business’s value and opportunities.
Professionally prepared business valuations are more than just an opinion of value. To get there, the analyst must understand the business’s underlying performance and the market it operates in. It requires research and insight beyond three years of tax returns or financial statements. A valuation isn’t just a snapshot in time. Opportunistic owners and buyers understand that it’s really a guide to future success.
Valuation is both art and science. Each is an irreplaceable element of a professionally prepared report. Software and online products provide rudimentary estimates – that’s the science part; one entry plus another makes a result, often using averages, median values or “rules of thumb”. In reality, few businesses are average. They are unique with a unique business value.
When owners settle for an average, most of the time they settle for a value that’s wrong. What the science part is lacking is the experience to know when to deviate, take an alternative approach, or make a judgement. The science part doesn’t ask “why”. The art part not only wants to know why, but “how” and “what if”. There’s no algorithm to approximate the experience created by working one-on-one with hundreds or thousands of unique businesses. Market, economic and demographic trends. Competition, technology disruption, and operational structures. What happens outside the numbers can affect real business value by tens of thousands to millions of dollars.
"The first step to a more profitable, more valuable company begins with a business valuation that provides owners the information they need to plan, and then to act."
- Odee Ingersoll, President and Lead Analyst at Pinnacle Consulting
So, when do business owners need to know the real value of their business?
- Three years in advance of an expected transition is a great place to start. Buyers and lenders will want this historical performance to judge the business. A reliable valuation provides a starting point. It shows what the business does well and demonstrates opportunities for improvement. Raising value over time will increase real sale or transition opportunities. If a “value gap” is present – the difference between a firm’s true market value and what an owner wants it to be worth – there’s time to close it.
- If three years isn’t an option, get started now with whatever time is available. There are some steps that can be taken to immediately raise business value, even if a longer-term approach isn’t possible.
- When a deal is underway, the business may be valued again, to support the agreed-to purchase price and required financing. Determining if a credentialed report is required depends on the value of the underlying tangible assets, and more importantly, the proposed value of goodwill or the intangible assets. Increasing the value of goodwill is where real value opportunities lie. While physical assets tend to lose value over time, in a great business, goodwill should grow. Non-compete agreements or some intellectual property assets may add value too.
- Not all business events are planned. Businesses or owners facing litigation or other significant events need a reliable, fair valuation and a professional who can defend it.
Owners need to pay attention to the valuation approaches and methods used by an analyst.
An asset approach should rarely be used to value a successful business. More often, it is used when other approaches or methods cannot be applied, or to support another value approach. Profitable businesses should be valued using both a market and an income approach, and may include multiple individual methods. The market approach values a business using actual completed transactions of similar businesses based on annual revenue, EBITDA or seller’s discretionary earnings. The income approach uses public risk and investment returns, applying the result to either historical or pro forma financial performance. In each approach, various premiums or adjustments may apply depending on the method used, ownership interest being valued, and the assessment of the analyst.
The first step to a more profitable, more valuable company begins with a business valuation that provides owners the information they need to plan, and then to act.
In Nebraska, Ingersoll provides business valuation services statewide and inside the metro through Nebraska Business Development Center. Additional valuation and litigation support services are available nationwide through Pinnacle Consulting. Phone: 888.858.4548 national or 402.671.0401 Nebraska. Email – ingersollo@pinnacleforbusiness.com