A Business Valuation Can Tell the Story of Your Company
Qualitative Insights Strengthen Quantitative Analysis
Most business valuations are done because of some type of compliance requirement. A business owner may be going through a divorce for which the value of the business factors into the division of assets, or an estate must be settled. Valuations also are done to help settle shareholder disputes and other business issues.
But waiting until such a triggering event happens often diminishes the implicit value of both the process of a business valuation and the resulting report. At its core, a valuation tells the story of a given business. It tells the story of its past, where it is currently, and its future prospects. It does this in monetary terms, but the report also looks at non-economic factors.
Where the Value Lies
The value of a business is more than its profits. The bottom line is important, but the factors that drive the bottom line – the qualitative elements that support a well-done business valuation – are a significant part of the story being told. How strongly does the company recruit, train and retain good people? How well does it engage new customers and serve existing customers? How good are its relationships with vendors? What is the strength of its supply chain and supply channels?
Both the qualitative and the quantitative factors are key elements in the story of any business enterprise, and they influence the determination of the business’s value.
As we go through the process and look at those things, we attempt to find those pieces that are below the surface, that are not apparent in a balance sheet or income statement. We spend time with the owners and the management team, and analyze the competitive environment, looking at not only the company’s industry but broader economic factors, as well.
If we do that well, the result is our opinion of a company’s value expressed in monetary terms, but the valuation also tells a story that reflects both the qualitative and quantitative aspects of the business.
Why the Story is Important
For a potential buyer, the qualitative story can affirm the worthiness of the business, or provide a warning about weaknesses that don’t show up on the balance sheet. For a business owner, the story told by a full-scope business valuation can serve as an instructive guide to areas that need improvement in advance of a business exit.
If a business owner is considering a sale, a best practice would be to obtain a benchmark valuation at least five years before the expected sale, giving the owner time to make improvements that will drive value at the time of sale. Unfortunately, that seldom happens. With a full-scope valuation requiring an investment of $8,000 to $12,000, such a benchmarking valuation often is considered a luxury.
A current trend in valuations is to perform targeted evaluations, such as a deep analysis of a company’s supply chain or competitive environment, or a data-driven analysis of the sale prices of other businesses in the same industry in the preceding five years. Such procedures provide a snapshot, but not the full portrait that a full-scale valuation provides.
Value of a Full-Scale Valuation
Business owners understand they will exit their companies one day. But they often don’t understand that the difference in the terms and value they realize at exit can be significant if they don’t plan for it. It’s the different between a market-driven orderly sale at full value, or a fire sale value.
A benchmarking process allows you to have an early indication of how your business is doing compared to your peers. It uncovers where your company and your management are strong and where they’re weak in terms of underlying processes. Once you see that in economic terms, you can explore what’s driving these results. This is particularly valuable for closely held businesses with one or two owners, where the owners are the key managers. What would your business do if you weren’t there tomorrow? What processes do you have in place to mitigate your absence? Who should be groomed to take on more high-level responsibilities?
A full-scope valuation also gauges what’s going on in the marketplace in which your business operates. What are the opportunities ahead? What are the vulnerabilities and weaknesses? How might they affect the timing of your business exit?
Business owners don’t always agree with the findings of a business valuation professional. Sometimes they believe their businesses are worth more. It’s valuable to remember that a business valuation professional’s objective is to provide an analysis of what a third-party buyer would consider a fair value for the business.
If you are thinking of obtaining a valuation for your business, contact your Adams Brown advisor.