Many business owners spend years building their business, but have only a vague idea of what it might actually be worth. Often, business valuations are only considered when a sale is imminent or where disputes arise. In reality, understanding the value of your business well before any exit event can be one of the most powerful planning tools available to you.
Putting a figure on your business
When it comes to selling a business, the components that contribute to value are not just assets and earnings. A business valuation will take into account a range of risk factors in deriving those earnings, including, the concentration of your clients, diversity of revenue, industry and specific business risks, how valuable the key operators are to the success of the business, and how easily a new owner could pick up the business and run it successfully.
Why obtain an estimate of business value?
It allows you to answer important questions: Where does my business sit today? What’s driving that value? And what practical steps can I take to improve it over time? Even a “soft” or indicative estimate of value can provide valuable insight and direction – particularly if its undertaken periodically over a several year period. If you were to value your business today, and again in 2 years’ time, then the valuation can become a useful benchmark to how successfully your business is growing.
De-risking a business to add value.
One of the biggest influences on business value is risk. In simple terms, the lower the actual and perceived risk in a business, the higher the price a buyer is typically willing to pay up front. Reducing risk as a business owner takes time and planning – giving yourself a runway to add value by de-risking your business is a good way to build long-term value.
Simple strategies include:
Knowing which revenue lines generate the most profit so you can focus on streamlining and growing those areas of revenue for the business.
Diversifying your client base rather than relying on a handful of key customers
Management unhealthy reliance upon single suppliers
Having documented procedures and policies rather than relying on one or two key operators in the business
Preparing budgets and forecasts based upon reasonable assumptions
Business Value and the balance sheet.
The health of your Balance Sheet health is another oftenoverlooked factor in considering a business value. If you’re planning an exit from your business, having the time to plan your exit will allow you space to clean up debt, tidy up intercompany loans, and resolve structural issues in a taxeffective and controlled way, rather than under time pressure during a sale.
Selling a business as a retirement plan.
Many business owners consider the sale of the business as a wealth creation strategy that will generate a boost to their savings or superannuation in the future. Whilst this may come to fruition, this also carries risk. If your retirement planning consists primarily of selling the business, it exposes you to future risk if the business is unable to sell at the right time, or if the value you anticipate is not achieved. For many business owners, it’s wise to think not only about the sale of the business itself as a wealth creation strategy, but how the ongoing operation of the business allows you to create wealth over the longer term. Any business sale can be a future ‘bonus’ but shouldn’t be the primary way you fund your retirement.
Valuations & Insurance
Many key operators should have life or income protection insurance in place – not only to protect themselves and their families, but to help ensure the stability of the business in the case of a business operator being incapacitated or unable to continue working in the business. If your business consists of multiple business partners, having a buy-sell agreement will need a business valuation in place alongside the relevant insurance policies and it’s wise to revisit this valuation from time to time to ensure your valuation and insurance policies are up to date.
Getting an idea of what my business is worth
Even an informal valuation of your business can be useful in determining where the value lies and how to build long-term value into the business. If this is something that you’re keen to explore, the team at Saward Dawson are here to help.
