The Importance of Business Valuation
Maximpact Services | April 17, 2016
Being a business owner, whether new or established, is a constant challenge. Finding the right value for your business is key for success in your next phase. Whether you have decided to raise capital, merge, divest or sell, any potential investor will need a clear picture of what to expect before they decide to invest. There is no question that a professional business valuation, which highlights the value points in your business, is crucial.
Why You Need a Business Valuation
Business owners and interested parties need fair and honest valuations for a variety of reasons. For instance, you may actively be seeking shareholders or deciding to borrow against or even sell your company. Converting your business from a C-corp to an S-corp for tax purposes is another situation that calls for a formal business valuation.
How Business Value is Determined
For startups, their business valuations are typically based on financial projections identifying how much money they expect to bring in over a specific period of time. Existing businesses, on the other hand, will use historical and forward projections as a basis for their valuations. In any event, seeking new shareholders requires you to set a dollar value per share for both existing and new investors. The valuation is key to all parties in agreeing what is fair and equitable.
The reason for a capital raise could vary from finding and moving in to a brick-and-mortar location, hiring staff, purchasing or renting equipment, marketing the business, training employees, opening new markets and more. This is called your cost-per-share. Having your house in order is important to ensure a smooth evolution of your company and to continue to grow your business.
Completing your formal valuation enables you to decide and explain to an investor what they receive in return for their cost-per-share. For smaller investments, anywhere from 5 to 20 percent is the norm. This number is determined much the same way home values are determined: by comparing them with other, similar companies and by how well you stage, or present, your argument.
A certified appraiser may use one of three methods to evaluate your company’s worth:
- Market Approach: Based on “comps” or comparisons of other, similar companies
- Asset Approach: Based on how much money it would essentially cost to replace what you’ve managed to build so far
- Income Approach: Based upon future financial projection
An experienced certified valuation analyst will combine these methods in one form or another to arrive at an equitable figure. Not understanding this process, and inflating your company’s worth or underestimating it, can be the difference between success and failure. This is why it’s vital to have your valuation performed by a professional you can trust.
Increasing Your Business Value
As your company grows and succeeds over time, its worth will go up. A successful enterprise is one that shows a steady increase in cash flow, thus becoming a decreased risk, as the years progress. It should also grow and expand over time into new markets to remain competitive, meanwhile maintaining a steady growth rate.
How Your Business Value Affects Your Future Goals
Whether you begin with a smaller cost-per-share combined with a smaller shareholder percentage, or a larger cost-per-share in return for bigger stakes may not matter. Both Dropbox and Instagram today are estimated to be worth over $1 billion, according to Funders and Founders, but they both started with very different valuations. The founder of Dropbox began with shares worth $20,000 each for which he assigned 5 percent of his company. Instagram’s founder started much bigger by assigning his shares a value of $500,000 each, but in return, he gave away 20 percent of his company.
In the end, both companies reached the same financial plateau. They just achieved it in different ways.
When the time has come, and you are ready for a business valuation, use the trusted professionals at Maximpact.com. They will provide you a fair and honest estimate to help you successfully achieve your goals. Whether you’re looking for a complete valuation, or you need a simple broker’s letter, the professionals at Maximpact can help.
If you are unsure and need help identifying your needs, contact firstname.lastname@example.org to book a free consultation and to benefit from over 50 years experience in the business.