Do You Need a Business Valuation?

January 3, 2021

By

Kevin Valley

As we continue to grow and operate our businesses, we need to understand the levels at which our companies are increasing in value on an annual basis...

It all starts with an idea, our brands, our businesses – these were mere ideas in our heads that we took the time to flesh out, structure, and implement for the world to see, judge, and buy from us. We then figured out how to make them lucrative for ourselves by providing value to the customers we serve.

But do we know what these efforts are actually worth? Can you confidently say that you know, and can defend the value of your business?

To be agile and competitive, best practices recommend that we regularly review our business models and operational systems to identify performance gaps and forecast for future obstacles and growth opportunities. However, too often these plans fail to provide an assessment of the company’s fair market value, leaving many businesses vulnerable to the prospect of being sold at prices well below their worth.

So, when do you need a business valuation, and what are the benefits? Here I break down some of the scenarios where a business valuation will be prudent.

Capital Raising for Early Stage Companies

Whether it be the startup or growth stage, the lucky, skillful, and tactical ones amongst us are able to establish proof of concept, generate some level of traction and sales, and eventually get to a point where they require investment capital to scale and grow their businesses.

A business valuation is required as a starting point for negotiations with potential investors.

A point to note is that at the early stage, companies that are likely to seek investment capital are typically those with future earnings that are based on some form of technology. These companies often lack a meaningful financial track record and have few assets aside from the developed technology or intellectual property for which patents and/or trademarks may not have yet been obtained.

Raising capital is critical to early stage companies, however. As such, to reduce risk to the venture capital investor, the capital is typically provided in rounds based on the achievement of key developments or “milestones”.

Due to the uncertainty of expected future cash flows of young companies, valuations are usually subject to negotiations between the investors and the founding team.

Measuring Value Creation

As we continue to grow and operate our businesses, we need to understand the levels at which our companies are increasing in value on an annual basis. Without employing the valuation methods most suitable for our business models, or without the input from a professional business valuator, this can turn into quite a nebulous exercise.

The services of a Chartered Business Valuator (CBV) will assist in determining the proper segregation and valuation of your company’s various business segments, the results of which can be a key element in the successful positioning, restructuring and/or reorganizing of your business for long-term success.

For instance, does an increase in sales and profits in one year mean that your business has increased in value if its risk profile has deteriorated? What are the real value drivers in your business and what are the risks you should be aware of?

Fundamentally, the value of a business is determined by two main factors – risk and growth.

As a result, the main sources of risk management and value creation for your company may include:

  • Revenue growth – resulting from entry into new market segments, geographic expansion, and/or effective marketing.
  • Cost cutting – due to outsourcing, reduction in staffing and administrative costs, travel expenses, negotiation of cheaper supplier terms, etc.
  • Increased productivity – resulting from automation, digitization, improvement in logistics and supply chain management, etc.
  • Improved management of working capital – resulting from improved efficiency in receivable/revenue collection, maximizing on allowable time to pay suppliers, and being more prudent with your cash.
  • Acquisition of other businesses.

Intellectual Property and Other Intangible Assets

We live in a global economy that is largely intangible and centers around ideas more than things. Technology has enabled us to be far more innovative and efficient in the creation of products and services to provide to consumers. This has allowed us to operate with leaner business models and lower requirements for costly capital equipment and machinery.

In recent times, we have been propelled at an even higher velocity into the digital age which consequently has brought the concept of commodification and monetization of brands – personal or not – to greater prominence within the business domain. As a matter of fact, the most valuable commodity in today's market is called Intellectual Property (IP).

 

With the rapid migration of brick and mortar businesses to the online space, IP is quickly taking centre stage as the new currency of the global economy. As such, a significant portion of the value of modern-day enterprises can be found within its intangible assets such as franchise rights, goodwill, noncompete agreements, customer relationships, and intellectual property assets such as patents, trademarks, and trade secrets.

The biggest companies in the world today are valued almost entirely on their IP. These assets must be valued separately.

Capital Raising for Established Companies

An established company with a track record of stable and/or increasing revenues and profits may require an investment to fund its growth - whether it be through launching new product lines, establishing new production facilities, or the acquisition of other businesses.

Companies at this juncture of their growth may be attractive to institutional investors such as investment management companies, private equity firms, and hedge funds seeking significant returns on their investments.

Additionally, market conditions may be ripe for raising capital from the public via an initial public offering (IPO) and you may wish to sell a portion of your company’s shares while the value is high. Alternatively, you may contemplate selling off some of the company’s non-core operations to purchasers that see them as more of a strategic fit.

Regardless of the funding route taken, it would be prudent to have a professional value your company to ensure you receive the highest price possible for your shares.

Selling / Exiting Your Business: Cashing in your chips

Though it might seem daunting, selling your business is not always bad news. It can be a great way to generate liquidity for yourself as a reward for your creativity, hard work, and perseverance to get your business to this point.

If you are looking to sell your company in the near term, a valuator can assist by providing a current valuation as well as detailed insight into the valuation process. The outcome of the valuation process and report can arm you with the metrics and tools to grow your business before selling, ensuring that you receive the highest price possible.

These are just some of the potential reasons you may need a business valuation.

At this point you must be wondering “how often should I do a business valuation for my company?” As a rule of thumb, it is recommended that you perform a business valuation at least annually and have one prepared for any company you are looking to acquire, merge with, or invest in.

If you are a new business owner or just starting on your entrepreneurial journey, you can benefit from a business valuation consultation for guidance on the right frameworks and structures to incorporate into your business operations today, to ensure it can Become Investible as early as possible.

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