Improve Strategic Planning With a Formal Business Valuation
A formal business valuation is essential for business owners to understand the value of their company and make informed decisions. A formal valuation conducted by a Certified Valuation Analyst (CVA) or other qualified professional is a full diagnostic exam for a business, yielding information that is not available elsewhere. A good valuation drills down into a company’s financial and operational health, revealing insights that might otherwise remain hidden.
Characteristics of a Formal Valuation
A formal valuation goes beyond simple financial analysis, assessing both tangible and intangible factors that impact the worth of a business. It is a holistic approach that takes into account a wide range of factors—financial statements, industry trends, market conditions, competitive positioning, and the unique traits of the individual business. It gives a far more comprehensive picture than the internally generated reporting availability to most businesses.
For example, a formal valuation tells the owner of a closely held business how the company’s cost structure compares with those of the industry, revealing whether the owner is enjoying the same level of profitability. The valuation report tells the owner what the company is worth today, but what it could be worth. Put to a good use, the valuation lays out the roadmap to get to ‘best in class’ and tells the owner what that is likely to mean for the profits and value of the company.
A True Picture of the Business
One of the first things that a valuation report should address is revealing the true earnings of the company from an objective perspective. In most closely held businesses, the owner’s compensation, discretionary expenses, and other personal costs are intertwined with the company’s finances. The real earnings power of the business, which is what drives value, may well be hidden.
The CVA will adjust financial statements by “normalizing” earnings, which removes owner-specific expenses and other discretionary items and adds them back into the profit calculations. This gives a clearer, more accurate view of your earnings potential. Understanding your business’s true profitability is critical for future planning, allowing for better decision-making regarding investments, growth, and long-term strategy. Investors and lenders look for normalized financials to assess your business’s actual value.
A formal valuation is a crucial process in assessing a company’s value, identifying potential risks and weaknesses, and determining the value of its assets. It helps identify vulnerabilities such as customer concentration, key person reliance, cash flow management, outdated technology, and legal and regulatory compliance issues. These risks can be identified early on, improving the stability of the business and preventing potential fallout from economic, technological, or financial changes.
Understanding the Intangible Assets
Intangible asset valuation involves recognizing the value of knowledge and reputation, which can represent the greatest portion of a company’s value. Recognizing these assets helps leverage them more effectively for strategic growth, financing, or preparing for a sale.
Competitive advantage is another critical aspect of a business valuation. It examines a company’s competitive positioning within the industry, considering factors like brand reputation, customer base, proprietary technology, and market trends. Understanding your competitive advantage enables you to focus on areas that keep you ahead of the curve, such as product innovation, customer service, or operational optimization.
A formal valuation provides actionable insights to improve and enhance your business. It provides a data-driven foundation for strategic planning and growth, helping you prioritize initiatives that will have the greatest impact on growth. For example, if the valuation reveals that your company’s value is heavily tied to one product line or customer group, it may be time to diversify to protect against market fluctuations. Conversely, if the valuation shows strong potential in an underdeveloped area, you can focus resources to capitalize on that opportunity.
Exit and Succession Planning
In mergers and acquisitions, knowing your business’s true value gives you leverage in negotiations. A well-supported valuation ensures that you enter discussions with a solid understanding of fair market value, allowing you to negotiate deals that maximize return on investment. This can prevent undervaluation and ensure you don’t leave money on the table.
Succession planning is essential for closely held businesses, as it provides a clear, unbiased picture of the company’s worth, which is critical when planning an ownership transition. A formal valuation helps ensure fair treatment of all parties and minimizes family conflicts or disputes among stakeholders.
Accessing capital is another important aspect of a business valuation. Presenting a formal valuation signals to potential investors or lenders that your company is well-managed and financially sound, offering credibility and reassurance that they’re making a sound investment.