Your business is humming along. You have no plans to sell or to go public. You’re planning to keep your business going and growing for the foreseeable future. Your advisor suggests you have a baseline valuation done on your business, but you don’t understand why that’s necessary.
Prepare for the Unforeseen
You should have your business valued before there is a “real” reason to do for one important reason: No one knows when their plans will change because of unforeseen circumstances. When it comes to your business, having a baseline evaluation will enable you to operate from a position of strength because you’ll be relying on facts rather than on estimates and suppositions.
Valuations can alert you to factors that affect your bottom line in different ways. For example, you may be alerted to issues or opportunities you never knew existed. These can run the gamut, from tax and accounting issues, to how your business fares when it is benchmarked against similar businesses, to your estate plan, to key personnel insurance.
Gain an Objective View
As a result of an independent third-party valuation, you’ll gain an objective view of where your company stands now as well as its opportunity for growth. Consider this: You may get an unsolicited offer for your business. Even though you weren’t planning on selling, the offer is so good it would be negligent not to consider it.
Without a business valuation, you might decide to simply take the offer without analyzing it. As high as the offer might appear to be, however, it could be lower than what your company is truly worth.
Suppose the great offer you got was based on multiples of the previous year’s revenues and EBIDTA. EBITA is a valuation method that measures your company’s earnings before interest, tax, depreciation and amortization. Essentially, it measures the company’s cash flow without considering the impact of important factors affecting that cash flow, such as growth potential or the tax environment.
Depending on the particular circumstances of your business — including where it is in the business life cycle and whether it is a cash- or accrual-based business — a valuation based on past revenue and EBITDA alone might undervalue your company.
Consider Personal Matters
Other company-related factors may be pertinent as well, such as whether one or more owners expect to retire or cash out in the next few years, how often expensive equipment needs to be upgraded and whether the company is involved in litigation. And then personal matters also must be considered. Among other things, divorce, serious illness or the unexpected death of a senior executive can require the need for a business valuation. It can get complicated.
Although it’s impossible to anticipate everything that may happen, being prepared is always the best option. Having a baseline valuation all the principals are familiar with puts you in a better position to negotiate if and when the need arises.
Call us today for assistance preparing your business’s baseline valuation.