The Logic of Business Valuation

Business owners sometimes wonder why they should be interested in their companies’ valuation when they have no intention of selling the business. Exiting is hardly the only reason for learning your company’s market value. As a business owner, you need to know the baseline value of your company if you want to successfully build a business with transferable value. Valuations can play a pivotal role in the achievement of your growth objectives. The right assessment of your business value at different stages of its life cycle helps you steer its strategy in the right direction. It also enables you to track your business’s key performance indicators (KPIs).

Let’s take a closer look at some of the most significant reasons why business valuations are key to your company’s growth.

An insightful management tool

Valuation measures the efficacy of your strategic decision-making process and helps estimate changes in its overall value, not solely its revenue. In this way, it can be a powerful business-management tool, providing a comprehensive overview of your business and helping you make sound, informed business decisions. Valuation helps you identify indirect forces affecting your company and circumvent the unexpected consequences of apparently minor decisions.

A versatile navigation instrument

Valuation determines where you are and – by serving as a compass – in which directions you can readily go. The valuation process itself casts a stark light on considerations you may have missed and helps business owners make critical decisions they may have deferred. It can indicate necessary structural changes, suggest strategic reshuffling, underscore the potential return on investments in technology or human capital, and highlight opportunities to expand business through mergers, acquisitions, or joint ventures. On the other hand, it may also prompt owners to scale down their business operations.

Valuations might be the best tool for measuring growth and progress toward broad strategic goals. Businesses that perform valuations at regular intervals are able to track their performance against pre-established goals, using valuation as a powerful measure of the success of their business plans.

A report on the pulse of your business

Like a check on your heart rate, valuations put a finger on the pulse of your business. They function as an appraisal of best practices and a diagnosis of areas that require improvement. Revenues and profit may go up in some years and down in others, both for reasons that have more to do with market forces than with your company’s intrinsic efficiency and productivity. Without going through a proper valuation process, you may never know the actual condition of your business.

A guide to weak spots

A holistic valuation process also accounts for non-financial aspects. They may include organizational infrastructure, the level of technology used by the company, client demographics, and the corporate structure of the company itself. KPIs can pinpoint areas for improvement, helping you enhance your company’s value.

A guarantor of accountability

Once performance gaps are identified and a course of remediation chosen, the onus rests on the business owner to follow through. This requires owners to institute responsibility within the organization at every level, including the owners themselves. Accountability is a functional element of a strategic business plan: if you can measure it, you can manage it.

A means of predictive analysis

Valuation is an ongoing process, and wise business owners get their business re-valued regularly to gain a perspective on its worth. As the time for transition approaches, which it does for every business, historic valuations provide a preliminary point toward setting a price. Knowing your company’s worth is invaluable both for generational transfers and external sales. Business owners who do not have a firm sense of their valuation histories may be in for a shock when the time comes.

An important component of your net worth

A business’s value typically represents most of the owner’s net worth. Business owners seldom diversify far beyond the position they hold in their own business. If you know the effect of your company’s value on your personal finances, you can plan more assuredly for your own future.

Finally, the detailed examinations necessary for a proper valuation reveal the inner financial workings of your company like no other exercise can. Valuation helps you understand what is going on in your business, make more informed strategic decisions, and channel resources properly.

Cap Expand Partners’ valuation services

Cap Expand Partners assesses the value of your business or that of potential acquisition targets, including cross-border companies. Whether you are buying or selling a business or planning to expand your operations overseas, valuation is a fundamental and enlightening step.

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