If you don’t understand the true value of your business, you may be missing out on opportunities to grow its value.
“Valuations aren’t only necessary when selling a business or when a dispute arises,” says Owen Sizemore, CPA, CVA, manager, Valuation Services at Brady Ware & Co. “An annual valuation gives you a sanity check on how much your business is really worth and can start a conversation about the things you can do to create additional value. Valuations are a general management planning tool for business owners to understand whether the decisions they are making are creating value for the business and themselves.”
Smart Business spoke with Sizemore about the reasons for valuations and how technology is impacting the industry.
What are some reasons a business would require a valuation?
In addition to providing a deeper understanding of the company and identifying opportunities to increase its value, a valuation is necessary when there is a potential transaction, as in a sale or purchase. It is also a valuable tool in instances of a dispute between owners, or a shareholder dispute, in cases of divorce, or for a bank audit. Knowing that number is also useful for estate planning and when transitioning ownership to the next generation.
The process starts with an initial conversation between the valuation expert and the client to understand why the valuation is needed to make sure they are providing the appropriate level of service. The expert will gather information, such as tax returns and financial statements, to understand the scope of the project.
To prepare for a valuation, it’s critical that a business owner ensures that records are accurate. Keeping good financial records is just a smart business practice, but having clean books is critical to having a valuation done well and cost-effectively. You want inputs to be as good as possible so the output is as meaningful as possible.
Are owners often surprised to learn the true value of their business?
If owners are guessing at valuation, they often overshoot it, for reasons they just haven’t thought about. In many small businesses, a lot of the value is tied to the owner. Oftentimes, someone is an owner/operator, does a lot of the work and has a lot of the technical knowledge. In that case, if they want to sell the business without being a part of it going forward, it’s probably not going to be worth as much as they think.
In addition, some businesses have a high customer concentration, relying on one or two customers for the bulk of their revenue. Owners are often surprised by how detrimental to value these customer concentrations can be.
When you’ve spent your whole life working on something, it’s hard to be objective about it, which is why I encourage owners to get a valuation on an annual basis so there aren’t any surprises.
How is technology impacting the valuation process?
We are starting to see a commoditization as valuation software is starting to gain market share. But while software is competing on price, software alone may not give you the full picture. And it doesn’t address the subtleties and deep knowledge that a valuation expert — backed by a full-time, dedicated valuation team — can provide.
Valuation experts are really seeing the need to specialize, focusing on one industry, such as manufacturing, or one area, such as disputes. This provides businesses with a valuable adviser, with whom they can have a meaningful conversation about how to create value and manage their business more effectively.
It’s a good opportunity to work with an expert adviser who has seen a lot of businesses similar to yours and who can bring ideas to the table you might not have thought of.
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