A business is often a significant asset in an entrepreneur’s life, and its value can be the culmination of a life’s work.
For this reason, when considering selling your business, planning your future exit strategy, bringing on board a strategic partner/investor, or even raising finance, it is essential to have a realistic understanding of your business’s value to make the deal work optimally. This is best achieved by getting an independent valuation.
The downside to getting your valuation wrong is underselling your business or more likely, in our experience, building an unrealistically high expectation that could slow down or compromise your ability to carry out a potential transaction. This will be significantly more expensive than getting an independent valuation.
The Upside Of A Professional Valuation
An independent, professional valuation will go a long way in convincing the counterparty that the valuation is realistic, and will also help manage your expectations.
An independent professional valuation allows you to focus on extracting the maximum value from the deal while the valuer defends their assessment. Conducting a valuation requires high skill and technical expertise, including thorough financial knowledge. It involves a detailed understanding of the company’s cash flow, income statement, balance sheet, business model, and growth strategy. A realistic valuation also requires insight into the specific markets and sectors where the company operates, as well as broader macroeconomic factors. Additionally, various non-numerical factors can influence what a strategic buyer is willing to pay.
The Art And Science of Valuation
Numerous valuation methods can be applied and a good valuation never uses only one approach. Valuation has elements of science and elements of art. It is possible to generate a theoretical valuation of a business but as we have seen on many occasions, there can be a stark difference between a valuation prepared on an academic basis and the true value that a company would sell for in the market. A reasonable valuation requires both technical skill and a deep understanding of the commercial reality of running and selling a business.
When assessing your valuation expert make sure they have the technical skills but more importantly make sure they have successfully run, bought and sold businesses. This combination will cover both the science and art of valuation, and ensure the final answer is reasonable and defendable.
As a final thought, even if you aren’t planning to sell your business, the process of valuing your business will allow you, as a business owner, to identify the specific areas and variables in your business that create or destroy value and its twin sister–cash flow.
This will allow you to put a targeted strategy in place to build cash flow, and in turn, build value. Many business owners run their business based on variables that, whilst important for operational purposes, are not necessarily value-driving. A firm and comprehensive understanding of what creates value may inform strategic and tactical decision-making.
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