Whether trying to acquire a company, raise capital, or plan for eventual exit, a business valuation is necessary to understand your position and what your options are.
Hypothetical scenarios where a business valuation is necessary:
- A business owner is considering selling his business within the next two to three years. A business valuation report would tell him how a buyer would look at his business today and, knowing that value, he could decide if it was the right time to sell. A valuation would also help the owner business understand how he could increase the value of the company.
- A business owner has grown a very successful business in a highly competitive environment. Although his business generates a significant amount of income, much of the owner's wealth is tied up in the business. The owner is worried about his lack of diversification and would like to explore options such as selling shares to management or to outside buyers. A business valuation would allow this owner to set an appropriate price at which to sell shares at.
- A growing company needs to raise funds and is considering issuing equity to existing investors and potential outside investors. The company's owners need to know the value of the company in order to avoid giving away too much equity in return for too small of an investment, while at the same time, potential investors would want to know that they are getting a fair return for their investment. A business valuation would help determine an appropriate price at which to sell shares to outside investors.
Business valuations are a key component in all of the stages of the business cycle. Following are some special considerations for the five stages of the business life cycle.
- Buying a business: Business valuations are an integral part of determining the value of a target company. This is the beginning and the end of the business life cycle. In some cases, both the seller and the buyer of a business may have their own independent business valuation report completed to determine the value of the target company.
- Raising Capital: Business owners may find that in order to grow their business, they need to find more investors to raise additional capital. The additional capital may come from existing investors or possibly outside investors. A business valuation would be a critical element as it would help the existing owners understand the amount of equity new investors should receive for their investment.
- Increasing Value: Companies that are established and profitable should continually monitor and evaluate their historical performance. A business valuation can help business owners determine the value of their business today and identify the areas that they may need to focus on to increase that value.
- Diversification: An inevitable concern for successful owners is that too much of their wealth is tied up in a single asset, their company. Although they may not necessarily be ready for retirement or to exit the business, it may be a wise decision to shift wealth outside of the company into outside investments. Much like raising capital and exit planning, a business valuation is needed to establish the price per share that the owner should expect to sell for.
- Exit Planning: A business valuation is a critical element to any exit planning strategy. The primary purpose of the report is to determine what the owners of the business should expect when initiating the sale process. The most important characteristic of such a report is that it examines the business critically from the perspective of a buyer. Special attention is paid to the areas that are critical to operations such as reliance on key employees/owners, concentration/diversification of customers/suppliers and the condition of the company's physical assets.
