It’s important to have an accurate gauge of your company’s value – even if you’re not planning to sell your business immediately. Knowing the value of your business provides a wealth of valuable information that can enable you to make intelligent decisions about important business planning issues and your ownership succession planning. The value of your business is not one you can assume or estimate accurately on your own. It’s crucial to work with experienced professionals.
While certain events could necessitate that a valuation of your business be performed – for example, transfer of ownership via estate, gift or shareholder buyouts – business valuations serve an array of strategic planning purposes as well.
The Importance of a Business Valuation
When performed by an experienced professional, a business valuation provides a baseline of value for your business as of a specific point in time. If the value of your business is below your expectations, the knowledge gives you time to “drive value” through planning for improvements in cash flows, growth or diversification, and/or reducing business risks to move toward the value you want. It also helps you understand key metrics that drive your company’s value, which are often known as “Value Drivers”.
Strategic and Exit Planning
Part of what a valuation analysis can include is an assessment of your company’s profitability and growth trends. This, in turn, can be used to help you develop a strategic plan or an exit strategy for your business. Developing a three-, five- or 10-year plan will allow you to focus on areas of the business that will maximize the value of your company. Incorporating your time horizon with these “Value Drivers” can thus become an integral part of your business and exit/succession planning process.
Buy-Sell Agreement Development
If you are a co-owner of a business, having an accurate assessment of your company’s value is an important part of the development of your buy-sell agreement.
A buy-sell agreement essentially outlines the provisions for ownership transfer in the event of an unexpected or tragic event, or when one owner decides to exit or retire. Simply put, every business with more than one owner should have a buy-sell agreement in place. Click here to learn more about buy-sell agreements.
A well-crafted buy-sell agreement will also provide a details on how the business will determine ownership value. This planning can involve an initial value and annual updated amounts, or a valuation formula or method agreed upon by owners with the help of a valuation expert.
Driving More Value into Your Company
Value drivers are an important facet of your business that drive improvement in cash flows and/or reduces risks. Value drivers can vary by industry, so it’s important to work with a Valuation professional, like the ones at Corrigan Krause, to make sure you’re considering your important value drivers, such as:
- Reduction/Mitigation of Other Risks
- Cash Flow