Know Your Worth: Valuations and your business
Updated: Jul 23, 2021
By Angie Brown
Whether you’re pursuing growth, preparing for sale, or complying with regulatory or financial requirements, you can’t get far in the decision-making process without knowing your business’s value.
Understanding your business’s worth not only gives you a clear picture of where you are today - it helps you determine where you need to go. You can focus on what drives value for your business and what detracts from it. Valuations can help you navigate important changes and respond to planned and unplanned business opportunities.
However, for this to happen, you can’t treat a business valuation as a one-and-done event - or something to implement just before your exit. It needs to be embedded in all your operational and strategic decisions - throughout all phases of your business lifecycle.
Once you acquire that first business valuation, you immediately get a sense of your business’s strengths and weaknesses. If this valuation occurs early in your business life cycle, then you can gradually take steps to increase the value of your business over time.
But how do you know if a business decision will add or detract value? The answer isn’t always cut and dried, but there are a handful of key business areas that are more likely to impact the value of your business.
A business that shows stable or growing cash flow trends, supported by consistent profit margins, is attractive to potential buyers, lenders, and investors alike. Tracking your cash flow trends can also come in handy if you encounter operational challenges. By identifying issues early, you can quickly mark a path to recovery - and demonstrate your resiliency in the process.
A business is significantly less valuable if its success is completely reliant on the owner. That’s why a strong, independent management team is invaluable. As your business evolves, pay close attention to how your management team works together - and take strides to foster the leaders of tomorrow.
Your value will be higher if you’re a leader in your industry and have a strong reputation, recognizable brand, and advanced technology.
Highly valued companies have diversified customer bases - and a large proportion of those customers are ideally signed to long-term contracts. Additionally, you don’t want customer relationships to be tied to you, the owner - rather, you want to make sure they’re shared among the management team.
Product or service offerings
The more differentiable and scalable your offerings are, the more valuable they’ll be.
Preparing for the future
As your business progresses through its life cycle, new decisions will arise that will benefit from an updated valuation. For instance, it will likely make sense to acquire a new valuation if you’re considering any of the following.
Employee stock options
As your workforce grows, you may consider offering a stock option plan as part of your employee retention strategy. In order to set that initial share purchase price, you’re going to need a valuation.
Change of corporate structure
Perhaps a day will come when you want to switch from a sole proprietorship to a partnership - or even incorporation. Whichever path you choose, when you make changes to your corporate ownership structure, all parties will have to agree on an accurate value of the shares if you hope to avoid future conflict.
Tax and succession planning
To avoid paying more tax than you need to - particularly when it comes time to leave your business - it’s important to set up a sound tax plan years in advance, which inevitably involves an accurate valuation of your business.
Keep value top-of-mind
It’s clear that business valuations go beyond merely pricing your business for sale. If you’re making strategic and operational decisions with your business’s value in mind throughout its life cycle, decision making not only becomes easier, but you won’t have to do as much heavy lifting when it comes time to exit.
For a better understanding of valuations and what they could mean for your business, speak to our Grant Thornton advisor, Angie Brown.
Angie Brown (CPA, CA, CIA) is a leading business advisor with Grant Thornton LLP in St. John’s. She is an agile professional with over a decade of accounting and corporate finance experience. Angie creates value for her clients through business planning, financial modelling, buying and selling businesses, feasibility analysis and cash flow management.
Whether you’re just getting started, expanding a current opportunity or selling your business interest, Angie and her team have the expertise to help you navigate through all levels of change.
Contact Angie Brown at Angie.Brown@ca.gt.com or +1 709 778 8841.