Some business owners think of a business valuation as simply a sticker price for their business — if you’re not trying to sell, why does it matter what your business is worth? But a business valuation can provide valuable insights into competition, asset values, and income values.
At Iron Wheel Solutions, we recommend that business owners conduct a full business valuation at least every twelve months. A recent business valuation is a treasure trove of data that business owners can use to make important decisions in both the short and long term. Here are a few reasons you should consider getting a business valuation this year.
Knowing Your Company Assets
You might have a rough estimate of how much your total company assets are worth, but having an exact number is much more beneficial. If you’re trying to make decisions about acquiring future assets, obtaining insurance coverage, or reinvesting in the company, it’s good to know what you’re already working with.
Furthermore, knowledge of your assets can come in handy if you ever find yourself needing cash. Knowing the value of the various assets that you have at your disposal to sell will make you much more capable of making tough decisions should the need arise.
Maintaining a Detailed Company History
You may not be thinking about selling your company in a year or two, but what about five? Or ten? When the time comes, a potential buyer is going to want not only a detailed breakdown of what the company is worth right now but also a comprehensive history of where the company has been.
If you’ve been conducting business valuations since the beginning, you’ll be able to show a future buyer that the business’s value is rising, that you’re investing wisely, and that you’re budgeting well. The more information you can bring to the table, the better you can defend your asking price.
Keeping Detailed Books
Obviously, you should be keeping detailed and accurate finances on your whole business, whether you’re planning on selling or not. But occasionally, oversights slip through the cracks. Maybe you’re spending money on software you don’t use any more or you can get a better price from a different vendor.
Conducting a full valuation will uncover every aspect of your finances so you can evaluate the smartest way to use your money. If there are any mistakes in your finances, you’ll uncover them and be able to correct them before the problem gets any worse.
Don’t confuse a valuation with an audit. While the main purpose of an audit is to prove that the numbers reported by management are true and accurate, an audit doesn’t contain the kind of detailed information that buyers and sellers are interested in. For example, an audit will tell you that the amount you think you’re spending on vendors is accurate — it won’t tell you if that’s the right amount to spend.
If you’re trying to court an investor for a new influx of cash, they’ll want to see more than just your earnings statements. Providing them with a complete valuation is an excellent way to show them exactly how you run your business, how you’ll spend their money, and how they’ll make it back.
This is another instance where having a history of valuations is helpful. If you can point to growth trends over time, you can more reliably predict the way that your company is likely to grow in the future, earning new investors their best returns.
More Bargaining Power
You might not have any intention of selling, but you may still receive offers out of the blue. Bigger businesses might want to acquire your business or merge with it, and they’ll already have a number in mind when they approach you.
If you have a recent valuation of your own to look back on, you’ll know immediately whether their offer is fair and why. You can dismiss their offer, counter, or make one of your own with a solid foundation of information to back you up, confident that you’re not being fooled out of your hard-earned business.
Once you know your company’s value, you can set goals to increase its value by a certain percent every year. You can measure growth, losses, and look for areas to improve. Knowing what your business is worth is an invaluable asset for any business owner.