What You Need to Know About Business Value
The sale of a business is potentially the most significant financial event of a business owners’ life. Therefore, knowing the value of the business, and more importantly, getting that value for the business is of crucial importance for an owner.
While understanding the value of a business is important, it is equally important for an owner to understand the factors that increase and decrease the value of a business.
Often, business owners believe they know their company’s market value. However, an owner’s opinion of the value of their company may or may not be accurate. When arriving at the value of a business, a business owner should consider the following:
The Purpose of Knowing the Value
A business valuation is crucial to a successful sale. But knowing the value of a business can be important for other reasons. A business valuation t is a powerful benchmarking tool that measures an owner’s objectives when exiting or transitioning. An understanding of the key elements of business value also provides the owner with insights into the operation of the business. These insights will enable the owner to emphasize profitability and value generation.
The Elements of Value
Often, the most important and unique factors that add to the value of a company are beneath the surface. These elements of the business are often overlooked, ignored, or not even recognized. Valuation professionals focus on uncovering these “hidden” elements of value.
Value is more about how the business is likely to perform in the future than how it has performed in the past. From the perspective of a potential buyer, these factors likely increase the value.
The Factors that Change Value
Value is dynamic. By that we mean, that the value of a business is always in a state of flux.
External factors impact the value of a business. External factors may include the economy, the mergers-and-acquisitions marketplace, stock market volatility, interest rates, geopolitical considerations, industry trends, and competition.
Internal factors also have an impact on value of a business. Internal factors may include the health of the owner, the stability of a businesses workforce, cash flow and profitability.
Changes will inevitably occur. And when they do, change factors can have a negative or positive effect on the value of a business.
Change can impact the transition plans of business owners or offer unexpected opportunities. The ability to interpret both internal and external changes will benefit those who focus on the value of their business and prepare to act.
The Inconsistency of Value
One cannot assume consistency when valuing a company. When one assumes that things will remain the same is certain to produce inaccurate results.
Summary
Whether the intention of a business owner is to sell the company now or put in place growth strategies to increase value, a valuation will assist in making intelligent and informed decisions and help the business owner understand the true market value of their business.
Understanding the factors that drive business value will assist an owner in identifying potential opportunities and areas for improvement.
Accurate knowledge of business value allows the owner to be proactive in determining, developing, and implementing strategies to achieve future goals.
In short, knowing the fair market value (FMV) of a business places the owner in control.
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