10 August 2021
By AR Advisors Director Adam Passmore
To paraphrase a popular real estate saying, your business is only worth what someone is prepared to pay for it.
Or perhaps more accurately, what someone is prepared to pay to secure the future maintainable profits or projected profits of that business.
But how do you get an accurate picture of what your business is worth? How do you know you’re not being overly optimistic? Or too conservative?
Using industry-specific Return on Investment (ROI) calculations will indicate what a potential buyer might be prepared to pay, but then there are variables to factor in such as:
Length of time the business has been operating
Whether it’s a consistent performer
Projected growth, especially in terms of profits
While a lot of information regarding business ROIs is publicly available, a business advisor or a valuation specialist can drill down into the specifics of your business to determine its worth to a potential buyer.
I’m not thinking of selling right now. Do I still need a valuation?
If you have plans to sell at some point in the future, valuing your business now will identify where any ‘value gap’ lies in terms of what it could be worth versus what it’s currently worth. An annual appraisal enables you to see year by year whether you’re closing the gap or getting further away from reaching your goal.
Regular valuations also reduce the risk of nasty surprises. You’re much more in tune with the reality of the market as opposed to what you think your business should be worth.
Note that the type of annual estimate we’re talking about here differs from the type of business valuation a third party might rely on, such as in the event of divorce or court proceedings. It’s also different to the valuation you might need if you were offering a new business partner equity in your company or finalising a shareholder agreement.
Help! The value is much lower than I’d hoped.
The good news is the valuation will have helped identify areas for improvement so you can start getting your business in the best shape possible – whether you plan to sell now or in the future. Your business advisor can work with you to identify what needs to happen to help you achieve top dollar.
By building a valuation into your annual review, you’ll always have that sales goal in mind and can make changes and improvements accordingly. Monitoring the value of your business also means you’ll have a better understanding of how the figure has been reached each year.