Three reasons why you should add a business valuation to your annual review
April 8, 2016
As a successful business owner, one of the most significant decisions you can make today is having your company valued. Most of the time valuations are only considered when an owner or shareholder is close to selling or exiting the company. Questions like “What do I need to do to grow my business and take it to the next level?” or “What can I do to motivate my employees to strive for greater success?” tend to take precedence in the owner’s mind.
While these are respectable questions, ones that demand your attention and are usually quantified with universally known and accepted measurements such as “revenue growth”, “gross profit” and “return-on-equity,” I wonder whether the strength of your business model and overall health of your company should be tied to these indicators alone. Unfortunately, for many the buck stops here. Why consider other metrics of value when I have all the basics in place? How can having my business valued today possibly help in my planning for tomorrow? Here are three reasons why you should consider adding a business valuation as part of your repertoire when doing annual reviews:
Life is full of uncertainties. Something may happen that forces you sell or exit your business quickly. Good examples of this are death, disability, divorce or departure of a fellow owner/shareholder. Knowing the value of your business will help you, your family or your partner’s family understand the actual value of your business and sell at the right price. Having a proper shareholder agreement in place that is tied to an accurate valuation calculation is vital.
There will come a day when you no longer run your business. In the absence of unplanned uncertainty, you very well may exit your business on your own terms. If you are designing an exit strategy, the first thing you should do is have your business valued. No successful football coach throws together a last-minute strategy going into the 4th quarter. Instead, he carefully calculates every step – even before the game begins. At half-time, he evaluates and adjusts his strategy. In the same manner, having your business valued today will help lay the framework necessary for the second half and, eventually, the final minutes of the game.
A valuation will help you know what to focus on by identifying the strong and weak sides of your business, showing you the big picture beyond “revenue” or “gross profit.” Compare the vantage point of the football players on the field to the offensive coordinator in the box. While up close and personal, the perspective of the players on the field is very limited. The offensive coordinator has a unique outlook in that they are capable of seeing the entire field and how all of the pieces fit together simultaneously. Having this distinctive aerial perspective offers vision into what adjustments are needed so the game run more smoothly. The “aerial perspective” a valuation offers will help you see how the various parts of your business fit into the whole. Why play the game year-to-year from a limited vantage point?
Life’s uncertainties, planning to exit on your own terms and understanding the big picture are significant considerations that cannot be quantified from financial measurements alone. They must be carefully evaluated and contemplated. Completing a business valuation is the first step in an effective planning process, and should become a vital component in the annual review of what may be your greatest, most productive financial asset – your business.
Brent Saba is a Business Advisor for Quadrant Private Wealth. Saba can be reached at email@example.com or (610) 849-2752.