The number of business owners who either do not know or who have the wrong idea about the worth of their businesses is surprising. For the most part, this is because these owners do not place much stock in having business valuations done on their companies. After all, why should they dedicate significant time and resources to a business valuation when they are not ready to sell their businesses? Others may not be interested in knowing the true value of their businesses so long as their firms report profits year after year.
However, as a business owner, you need to understand what a business valuation is and why it is important for your business to have one done. Additionally, knowing when to have a formal valuation done on your enterprise could influence the trajectory of your business. Below we will discuss some of the reasons to have a professional value your company and how often to do it.
What is a Business Valuation?
Each business has a value attached to it. Customers, competitors and even shareholders rate the performance of a company based on their worth. A business valuation is a value professional business valuers assign to a business after extensively looking over the financial documents of a company.
Business valuations differ from estimates of a firm’s worth in two main ways. First, a formal valuation is typically conducted by certified valuers, though in some instances CPAs can value an enterprise. The second and more significant difference between a business value estimate and valuation is that unlike the estimate, a business valuation takes more time to conduct and is both more extensive and intensive than an estimate. Whereas an estimate would only take into account the financial figures in determining the value business, an appraisal would look into the non-financial side of the business as well.
Why Conduct a Business Valuation?
A business valuation plays a major role for lenders, business owners, potential investors, shareholders and numerous other parties tied to a business. Each of these parties has an interest in the worth of a business. An investor would want a business valuation conducted on a firm to make a decision whether to invest in that venture or seek out a better opportunity. For a business owner, an appraisal carried out by professionals could make the difference between one asking price and another when selling the business.
Because conducting formal valuations takes time and money, how often a company is appraised typically depends on two main considerations: the purpose of the valuation, and the succession plan for the business.
How Often Should You Appraise Your Business?
Should you ever take the time to look up how often companies are evaluated, you will notice that the period differs for many firms. Companies have business valuations done depending on their budgets and reasons for the same. If you are a business proprietor, stakeholder, investor or lender and you are not sure how often the firm you are associated with should be appraised, consider the following factors.
Business Valuation for Perpetuity
Individuals start companies for a variety of reasons and with various retirement plans in mind. For example, a man could start a hardware store to provide for his family and then decide to leave the business to his progeny. In this case, the line of succession within the business would be hereditary. Others start or join businesses to act as their retirement plans. Investors fund companies to enjoy investment benefits upon retirement. Many business owners develop products and grow their businesses so that they can eventually sell them. The plan of succession for a firm determines how often the company will need a business valuation.
A company whose succession plan ends with the sale of the enterprise will need a business valuation less often than most other firms, usually at the time of the sale or during tax seasons. On the other hand, if you intend to keep your company, you will need to appraise it annually or biannually, preferably annually. The frequency of the formal valuations will depend on the complexity of your company’s operations as well as the availability of resources to facilitate the appraisal.
Frequent appraisals will help you keep track of the financial state of the company. How much profit have you made? What is your company’s cash flow trend? Having the answers to questions like these through conducting a business valuation will help a business owner to make sound informed business decisions. The same goes for other parties with a vested interest in the business.
Valuation Frequency depending on Purpose
Conducting valuations depending on the succession plan provides interested parties with a fairly regular overview of how often to have them done. However, sometimes as a business owner you may have to conduct business valuations under specific circumstances, in which case it is harder to predict the frequency of the appraisals.
These circumstances include but are not limited to:
- When there is a dispute in the company and a valuation is necessary for dissolution
- When a partner decides to leave the firm
- When a valuation becomes necessary for estate planning
- When the company comes under legal suit
- When a valuation is necessary for strategic planning of the business
- Evaluation if you have the right level of insurance or paying too much
- Assistance with a divorce settlement
- When you need to raise capital for the business
- Relocation of the business
- Debt restructuring
In these cases, the frequency of valuations varies. The number of formal valuations the company will need could be as few as two per ten years or as many as one every year in these cases.
If you want a business valuation for a firm, the best option would be for you to hire a professional business valuation company to handle the appraisal for you. These are specialists who will not only place a value on your company but also guide you through the process. Having a formal valuation is also a great way to attract and reassure investors and potential buyers of the validity of the worth assigned to your company.
Feel free to reach out to us in case of further questions about business valuations.
Mathieu Paul
Director – Business Improvement
P: +618 6315 2755
E: enquiries@wabusinessvaluations.com.au
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
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