A company valuation may be required when looking to buy or sell a business, for changes in shareholding, to raise capital, loan funding or due to changes in personal circumstances. Sometimes this can be unexpected and buyers will take advantage if a quick sale is needed. Keeping an eye on your company’s value will mean you are prepared as you will have the correct information at hand.
Valuing a business is very subjective as people are looking for different things and have different priorities. Their interest will depend on how your business fits into their strategy which will determine how much they would be willing to pay or invest in your business. They may be looking to increase their market share, expand their geographical presence or buy out competition. A buyer may be wanting your business as a whole or to purchase only certain divisions or product lines. The circumstances around the sale of a business will have an impact on the price that is offered.
Measuring your business value is not a once off exercise but should form part of your overall business strategy. The plans that you make in terms of introducing new products, expansion or investment in resources or equipment as well as the timing of these strategies will have an impact on value.
Factors that buyers or investors will consider in assessing a business include:
Business Health will include a look at both the historical performance as well as future expectations. A healthy trend over a number of years will increase value. Adjustments will be made for abnormalities or once off events. Consideration will be given to the life cycle of the business and future growth prospects.
Stable and predictable cash flow is important as many valuations are done using the Discounted Cash Flow (DCF) method. Looking at the age and condition of equipment and whether it is properly maintained will give an indication of future investment required.
A key consideration will be what Dependencies the business has. This may be the owner or other key personnel as the new investors will want to know that the business can continue to perform successfully. They will look at whether employment contracts are in place and whether there are any succession plans to de-risk the loss of these staff members. Other dependencies may include reliance on suppliers or customers and associated risks around this will be assessed.
Reliable Financial Information will provide integrity to the numbers and projections put forward by the business. Investors will become uneasy if the numbers presented by the business cannot be substantiated and will require more analysis to be done or may even walk away as the risk may be too great. A clean set of accounts is an indication that the affairs of the business are up to date and reduces the risk around potential tax and litigation issues.
Corporate Governance is an indication of how the business is managed and the basis on which decisions are made. Having solid business systems and operating procedures will increase investor confidence.
Even though a valuation is subjective, performing your own valuation on a consistent basis is something that should be done regularly. In fact, when starting up a business you should have an exit plan in place. This may sound a little ridiculous, however, understanding what will increase the value of your company will enable you to ensure that you continue to build an asset that has value.