In a study conducted by Massachusetts Mutual Life Insurance Company (MassMutual), 70% of entrepreneurs regularly think about their business’s value. However, they don’t always know what the actual business value is. Of course, as an entrepreneur, you want to improve your business and exceed your goals. To what end, though? Growing revenue without understanding the impact on the overall business valuation is a mistake. For instance, increasing revenue that ends up reducing profit margin doesn’t help. This is where accurate business valuations come in.
Aside from knowing what your business is worth, it is the starting point to create a plan of action to increase the valuation of the business over a set time. In fact, creating an exit plan two years before you want to exit your business allows you to put a plan in place and see the impact on the valuation for your business.
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What Is A Business Valuation?
Business valuations give you an objective view of your business and its financial value. Additionally, it can help you arrive at decisions that are beneficial to you and the growth of your business. Compared to the market, it gathers information on your business, like its income stream and assets. Additionally, professionals will look at the nature of your business, products, services, and other intangible assets.
A Business valuation requires accurate financial information
Income statements and balance sheets are the two most significant financial documents when valuing a business. Therefore, a proper valuation will require access to three to five years’ worth of historical income statements and a balance sheet.
A potential buyer can see a snapshot of your business’s financial health and performance with your financial statements. Incomplete or inaccurate records will prevent you from obtaining an accurate valuation. Bad data in means bad data out. Furthermore. It can signal to prospective buyers that there has been ineffective business management.
Past financial records will provide a perceived future transaction. Demonstrating your business can have a positive cash flow in the future, based on the performance in previous years, makes it easier to back up the assumptions in your forcast.
A business valuation is a starting point
If you are aiming to improve your business, having an updated business valuation is a great first step. Know your SWOT: Strengths, Weaknesses, Opportunities, Threats. It may sound overwhelming to get an appraisal every year or so. However, quantifying the strengths and weaknesses of your business clarifies what you are already doing well. It also helps you focus on improving what holds you back – which reduces your value.
Once you have a valuation, take the time to study it. Ask questions to help you form more impressive goals in the coming years, continuously increasing your valuation. But, again, it is your starting point, and it can help you focus on what gives your company the most growth.
A business valuation is essential in a negotiation
If you are at the point of contemplating selling your business, an accurate business valuation is pretty much a requirement. It is important to note that a business valuation does not guarantee that a buyer will automatically agree to that price. However, it does provide a methodology that includes historical information (profit and loss statements) and revenue forecasts. It is much easier to discuss the assumptions for revenue growth or increasing profitability than the math used to get to a particular number.
Investing in a valuation is a way to ensure that you are doing what is best for your business and yourself. Also, it can help you celebrate your progress and focus on those that need improvement. No matter what stage your business is in, acquiring an objective and comprehensive view of your company helps you to realign your focus and achieve your goals more efficiently.