5 reasons why regular business valuations are key

1. Focused growth

For businesses generating over $2m in revenue and achieving solid profits (or, even if not), regular valuations could help boost your bottom line even higher. A good valuation identifies the drivers of value in your business. These are identified by researching the industry and by asking relevant questions to the directors and/or management team. It is this combined with risk analysis that is used to determine the multiple/discount rate.

It’s likely that often you get caught up with the operations and putting out fires. So much so, that sometimes you don’t know where to focus your energy.

If a business has a mix of products/services/divisions, your focus could be going toward the least profitable area, which may drive that product performance up by 20%.

However, take that same energy and apply it to a higher-performing product, and you could drive it even further by 30%.

This value difference can be significant. Sometimes there may be strategic reasons why a different focus is required, but knowing the tradeoffs is key. When you know what the value drivers of your business are, you can concentrate on those things and drive profit higher.

2. Negotiating a potential sale

Small and medium-sized enterprises (SMEs) are being approached by larger businesses or private equity firms more and more. Often these larger enterprises will approach with their own idea of multiples and their own justifications. If you are equipped with knowledge of the value drivers of your business and have been focusing on optimising these, you are in a better position to justify higher values.

3. Succession/ESOP

Employee Share Ownership Plans are becoming increasingly common, as more employees are becoming motivated by having a share in what they are helping to create. After all, employees are a key part of the business. Valuation is a key part of this process. Having motivated employees who are focused on the value drivers of the business, combined with an interest in that growth, just makes a lot of sense.

4. Disputes and other exits

In the case of any shareholder dispute or other exit, regular valuations manage expectations.  Interestingly, they may also contribute to less disputes. Because a good valuation report will identify the value drivers of the business, and when used properly by the Directors, it creates focus and alignment across all stakeholders.

5. Strategy

With a good valuation, you know what makes your business valuable and the risks your business may face. This information can then be used to build a strategy. It helps with decisions such as, whether you should focus on increasing margins or growing revenue. Is focusing on a poor-performing critical product/service required for protecting the business, or do you need to focus on the strong areas of the business? Is a weaker part of the business worth keeping, or is it a distraction? Is it time to diversify client/customer base? Is a stronger relationship with suppliers required? Do you need to consider your terms of trade or negotiate better arrangements?

When it comes to business valuations, it’s important to remember that its not just a calculation. A good valuation report provides insights into the strengths and weaknesses of your business and opportunities for growth and improvement. By recognising the value drivers and potential risks, you’re in a better position to drive your business forward, maintain, optimise, and/or grow value. If any of the above makes sense to you and you are looking to take your business to the next level, reach out to Joshna or Humphrey for a chat.