Business Valuation as an Instrument for Management
Business Valuation as an Instrument for Management
By: Carlos B. Ortiz, Senior Manager
As explained in our previous blogs, there are many common reasons why business owners might need a business valuation, such as selling or buying a business, tax planning, arbitration and litigation, and securing financing, among others. If you may think a business valuation is not needed in none of those situations , you should think twice! The perks and benefits of performing a business valuation for management and company’s improvement are massive. It provides the business owner with many facts regarding the value of the company with respect to income values, asset values, and market competitors. Benefits could vary depending on the situation of each business owner, and even if they think they know their business completely, a valuation always adds certainty, reliability, and judgement to any decision they make for the success of the business.
That being said, only an X amount of business are valued every year... As part of a business valuation, there is a process of discovery for the expert and the business owner. The expert will ask questions to learn and understand the value drivers in the business. During this process, business owners usually take a step back from their daily routine and refocus on what drives value, determine reasons as to the existing capital structure and existing costs, and explore opportunities that may result in greater value. All these items can be illustrated by the valuation expert and hypothetical scenarios can be performed to illustrate the impact in value while all else being equal.
A valuation can help business owners determine plans to improve their company. For example, it can indicate that an expense can be reduced or eliminated, that there is a need for a certain technology or capital investment, or even hiring an employee to streamline internal processes. An in-depth valuation will implement key performance indicators (“KPIs”) to analyze some of the non-financial aspects of the business. Given that those non-financial aspects can be underlying value drivers, they are useful in identifying areas of potential improvement in order to maximize the value of the business.
Valuations can also help business owners and management keep track of the effectiveness of the strategic decisions made. This way they can make themselves accountable for maintaining and accomplishing goals in terms of estimated change in value. These strategic decisions help with the assessment and mitigation of risks as those are generally linked to financials, and if a proper valuation is not in place, it can be challenging to determine the accuracy of some financial areas. In addition, given that there is limited public data on what businesses could be sold for, it is an advantage for business owners to know their value in order to benchmark themselves with competitors.
Be ready to sell in case of an emergency
Lastly, businesses never know when an unforeseen event may happen, such as disability or death of the owner. An event like this may trigger a buy-sell agreement and the need to sell partial or full interest in the business. If this happens, the expectations of such scenario can be better managed, and a better outcome can be realized.
Here at On Point Strategy (“OPS”) we have licensed professionals, Certified Valuation Analysts® (CVA), who can guide you through the valuation process and help you fulfill your business needs. If you would like to find out more information about the #OPSway of providing business valuation services, visit https://www.opspr.com/bv1 or contact us at 787-766-6100.
