5 Reasons You Need a Business Valuation
How much is your business worth? The best way to answer this question is to leverage outside expertise and get a business valuation.
Business valuation refers to the process of estimating the economic value of your business. While different techniques and focus areas exist, the purpose is typically to paint a comprehensive picture of your business by looking at assets, profits, debt, potential for future earnings, and more.
Not sure if you need to have your business valued? Here are a few reasons to consider a business valuation.
Get a Clear Picture of Where Your Business Stands
There are many definitions of success in the business world, but a common way to determine if a venture is successful is to look at the economic value you have created.
A business valuation is a way of translating your time and hard work into a number. It reflects your business’s current health and can help you identify areas for improvement to strengthen your balance sheet. If you set specific financial goals when you initially launched your business, a business valuation can also be a benchmark for success.
Plus, this number is an important communication tool you can use to demonstrate value and potential to outsiders. It can be helpful if you’re applying for a business loan, reporting progress to existing investors, or want to attract new shareholders and partners.
Your business valuation can be an interesting comparison element. Once you have a better idea of what your business is worth, you can compare this number to valuations for other companies with a similar size and longevity. This comparison will give you a better idea of whether you’re fully taking advantage of the growth opportunities in your market.
With 50% of small businesses failing within their first five years, assessing performance and value regularly is crucial. Having a clear picture of where your business stands will make you more reactive if your business is falling short of expectations.
Evaluate Growth Potential
When conducting a business valuation, the earning value approach focuses on estimating the business’s growth potential.
This approach assesses performance by examining revenues, profits, and customer acquisition. It also considers external factors to determine future opportunities in your market and evaluate your capacity to leverage these growth opportunities.
Evaluating your growth potential is essential for setting realistic business goals. If your growth potential is limited, it may be time to explore pivoting strategies and seek opportunities in other markets.
Gaining insights into your growth potential is a helpful tool for comparing future opportunities to your current growth rate. You might find that your business has been underperforming or that your current growth rate isn’t sustainable. Scheduling regular business valuations can make you more reactive when pursuing growth opportunities or adjusting your current trajectory to adopt more sustainable business strategies.
Investors will consider your growth potential when deciding whether or not to invest in your business, and future potential earnings can help you make an informed decision about borrowing capital.
Create a Succession Plan
Even if you’re not thinking about retiring yet, you should know that planning a successful business transition can take years. It’s never too early to start thinking about your succession plan and implement a few strategies to maximize value for your successors and ensure your business continues fulfilling its mission after you retire.
Your succession plan can entail passing on leadership to another employee, a group of employees, your children, or an external buyer. Planning will ensure a smooth transition so the business can continue thriving.
Having a clear picture of your business’s value is crucial for choosing the right succession strategy and reducing tax liabilities.
If your succession plan involves selling your business, having an expert assess its value will help you set a fair ask price. You can also compare this value to average business sales in your industry and better understand what buyers are willing to spend. For instance, you might find that selling your business for its full value is unlikely given sales trends in your industry.
Business valuation can also be helpful if you don’t have a clear exit strategy yet because it can help you determine whether selling the business or passing it on to your children is more beneficial to the company’s (and your) future.
Determine Annual ESOP Value
An Employee Stock Ownership Plan (ESOP) is a retirement benefit allowing employees to earn business stocks through a trust fund. It’s a great way to make compensation feel more competitive while creating a cohesive company culture where employees directly benefit from your success.
However, ESOP requires accurate valuation of the shares issued to your employees so you can set a fair benefit structure. Valuation will also help you communicate the shares’ worth and clearly show the value of this perk, supporting employee satisfaction.
Besides, ESOP valuation is important for compliance reasons. Under ERISA, you must track and report compensation costs for the benefits you hand out. There are also tax implications that require precise valuation of the shares.
If you have an ESOP, you should schedule an annual business valuation. Regular valuations will help you comply with tax and compliance requirements, and you can adjust the amount of shares issued to employees annually based on fluctuations in value.
Plan for a Future After Your Business
Did you know that 65% of Americans would rather open a business than retire? For many, entrepreneurship is an appealing source of income in retirement.
Whether you remain involved in your business’s day-to-day operations, decide to sell it, or step back and let a trusted employee run it on your behalf, understanding how your business venture will support your lifestyle in retirement is crucial if you’re making plans for the future.
Business valuation can provide concrete data regarding profits, how much income you can expect to receive from your business once you retire, and what your tax bills will look like. Depending on the findings, you should adjust your retirement planning strategy to supplement your business income.
If you’re considering selling your business, the market value approach to business valuation will give you a better idea of how much you can expect to receive. You can use this information to identify the best time to sell your business, boost its value before selling, or decide to retain shares in your business rather than selling it.
Get Help With Valuing Your Business
A business valuation gives you a clearer picture of your business’s current state and supports better decision-making and planning. If you’re considering selling your business or want to update your succession plan, scheduling a business valuation should be a priority.
Are you still unsure whether you need a business valuation? Do you want to explore strategies to boost your business’s value? Lori Moen at Catalyst Group ECR can help. As a business coach, she has extensive experience valuing businesses and implementing successful growth strategies.
Please fill out our contact form today to tell us more about your business and needs!
