All too often, company owners only think about business valuation services when it’s time to sell their companies. While getting a sale valuation is a must to develop an idea of where your company lies in the overall market, understanding the value of your company is helpful for more than just when you sell; it’s also a tool that can help you better plan for the future.
What Is Business Valuation?
In short, a business valuation is a process that helps you understand what your business is truly worth if you were considering selling today. Many different factors play into determining a valuation and there are a number of different steps required to set a basis for the value of the business.
MelCap doesn’t just use just one analysis for our business valuation services; instead, we use a variety of methodologies and weigh them in order to determine what a company’s value should be. The market approach, for example, looks at factors such as market multiple and transaction multiple analyses. These tell us what’s currently going on in the market and what price similar companies are being purchased for.
Meanwhile, the asset approach uses methodologies such as the net asset value analysis. This will determine the net salable value of all the company’s assets if the business were to be liquidated. Finally, the capitalization of income approach looks at the historical cash flows or income and assumes that it is a proxy for the future expected cash flows/income. This analysis carries the least amount of weight because it’s largely based on assumptions of what the future will hold.
What Factors Could Affect a Company’s Valuation?
Any existing risk within or external to the company can negatively impact its valuation. If a company doesn’t have bench strength and depth in its management team, for example, this adds to the continuity risk if an owner is no longer involved. Inconsistent P&L performance can be challenging for a company to hold a higher valuation. Even if a company is coming off of a particularly strong year — if the past few years have been shaky, this will affect the valuation.
A concentration of customers can hurt the value, as well (for example, if one customer leaves, and the company could lose a large percentage of its revenue). Not having a diversification of suppliers can also ding a company’s valuation — what if a main supplier goes into bankruptcy?
That said, if a company has a strong growth trajectory or something unique or proprietary about the business, this can help strengthen the valuation.
The operation and well-being of the company itself is a major factor in determining its valuation, but there are other factors outside of the company’s control that can come into play, as well. Business valuation services will also take industry conditions into consideration And whether the industry is growing or declining. The overall market will also play a factor in determining a company’s worth.
If you’re planning to sell, it’s essential to understand what buyers want and then use business valuation services to see how your company measures up.
Why Might I Need Business Valuation Services?
Business valuation services are performed for a variety of reasons from estate tax planning/gifting to shareholder or partnership disputes. They’re also a wonderful way for an owner to get an understanding of what a business is potentially worth in order to assist their exit strategy planning purposes.
That last purpose is important. Business valuation services aren’t only performed to expose problems when you’re ready to sell. They’re also useful (and highly recommended) for planning ahead and identifying risks years before you plan to exit the company. This will help you address any existing problems and build a stronger, more valuable company. Whether the need is to increase profitability or diversify your customer base, a business valuation can help you better plan for the future.
Whether you’re a baby boomer planning for retirement or hoping to run your company for the next several years and want to understand what your goals and objectives should be as you move forward, obtaining business valuation services from MelCap can help give you a clear view of your company’s value, where it stands in your industry, and how it stacks up in the market as a whole.