Business Valuation

The real value of a business can be very different to how the owner values it according to some personal benchmark - Dennis Mattiske outlines the business valuation process and how it can help to improve performance and profit for the sake of improvement, as well as for selling it or for attracting investors.

How much is your business worth? It’s an important question that business owners often find very difficult to answer. In theory, it should be fairly simple as it is probably the business owner’s most important and valuable asset. Surely, therefore, they should have a pretty good idea of what it’s worth?

Yet most business owners struggle to come up with an accurate figure, and if they do it might be wishful thinking. Some like to believe that their business is worth whatever sum they think they need for a comfortable retirement. Others answer that they don’t need to know yet – they’re not planning on selling the business any time soon.

But there are many reasons for business owners to regularly value their business other than the obvious one of sale. A valuation requires consideration of many of the factors that govern the success of the business. These include how well the business is performing, what its potential is, and what opportunities are being missed.

If the business isn’t performing well, and if it has little potential, its value will be low. This usually gives business owners a strong incentive to improve its performance, both operational and financial, which in turn will improve its value.

A valuation is, in itself, a useful thing to have but it’s important to use the valuation process, and the consideration of all the factors that go to make it up, as an incentive to improve the business.

It makes good operational sense to value a business regularly, even once a year. A formal valuation may be time-consuming, but a valuation that provides a focus for performance can use assumptions and estimates and therefore be much less onerous and less expensive.

Once a valuation has been undertaken the first time, the same bases and assumptions can be used each year. The aim is to create a benchmark valuation process so that factors affecting the performance can be highlighted and evaluated on a regular basis.

Business owners should therefore understand the basics of business valuation so their expectations for the business are realistic and they can take steps to ensure the business is operating well and can reach its full potential, not just when it’s time to sell.

An accountant can help with a current valuation of the business, as well as identify ways of increasing the value that are specifically suited to the business. Business owners can then undertake the process themselves each year, to help measure their success and growth, until such a time as when they do want to sell.

Understanding the value of their own business also allows owners to move quickly when acquisition opportunities arise – they are more likely to know what the real value of the opportunity is to their own business.