Five reasons to do an annual valuation
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You probably think you only need to get a business valuation when you need to value the asset in a divorce or when preparing for a sale.
What if it became one of your annual measurements of the financial health, strategic direction, and overall performance of your business?
What if regularly monitoring your valuation metrics helped you dial in and amp up your growth strategies and tactics through an additional lens, one that looks at value and wealth creation in addition to income and profitability?
How might you approach your decision-making differently even if you never plan to sell?
Here’s my take on why adding an annual valuation to your growth planning can be a game changer for your business and your family:
Close Your Wealth Gap
Have you ever wondered if all your hard work will actually pay off some day? An annual valuation acts as a clear indicator of whether your efforts, investments and sacrifices are yielding long-term value. Your Wealth Gap is a key metric a valuation can help you benchmark and measure over time. Your Wealth Gap is calculated by subtracting your current net worth (not including the value of the business) from your wealth goal (usually a retirement or lifestyle goal). Usually the only way to close that gap is to build and extract (i.e., sell) that value from your business.
Not surprisingly, this metric ties into having a clear vision for ‘What’s Next’ for you and your business. Decisions like whether to retain ownership and/or to keep working in your business depend on what you want to do with the rest of your life. If you need more money to achieve your personal and financial goals, then it makes sense to plan to grow your business in ways that increase its value so you can make the most of this investment. By tracking your business’ valuation over time, you can measure how effectively your business is contributing to your personal net worth.
2. Close Your Profit Gap
In a valuation process, Purpose First Advisors will plot your business on a range of multiples for your specific industry. Using our Business Attractiveness and Owner Readiness assessments we’ll evaluate where your business ranks compared to best-in-class competitors. By benchmarking where your business falls on the range of values you can determine your Profit Gap - the amount of profit your business could be generating if it performed like its best-in-class peers.
When you hone in on where inefficiencies exist and improvements can be made your growth plan becomes more focused and effective. Your growth plan becomes a Value Acceleration process that increases value, wealth and profit.
3. Close Your Value Gap
Plotting your business on a range of values reveals both the Profit and the Value Gap. If your profit is below that of your best in class industry competitors, then your value is lower too. There is a gap between the current value of your business and how it could be valued once value is increased.
In addition to taking into account key financial metrics such as revenue, profitability, and cash flow, a Purpose First Advisor’s valuation will include intangible, but very real, drivers of value including the level of owner dependence, client concentration, process documentation, customer loyalty, and the strength of your team. Future prospective owners - internal and external buyers as well as family - will evaluate the health of the business using these criteria and an annual valuation is one of the best ways to assess your progress in identifying and preventing anything that can comprise the long-term health of your business. This clarity also transforms a growth plan into a Value Acceleration process designed to close all financial gaps.
4. Be Prepared for a Business Sale or Succession
You are an investor in your business. Knowing your current valuation helps you understand how your investment is performing compared to other investments in your portfolio. Why is this important?
If you want to pass your business on to your children, you want them to inherit a valuable asset, one that not only provides income but has value on the open market.
If you are thinking about having a key employee(s) purchase the business, a valuation helps them understand the value of the investment they would be making and start the conversation about financing and tax planning sooner rather than later.
Sooner is also better if you think you might, one-day, want to sell to a third-party, you will want to know sooner.
Opportunity may come knocking and you want to be ready to evaluate unsolicited offers.
5. Be Bankable
The saying goes, get credit before you need it. Your business valuation can be a key metric when securing a bank loan or financing. Lenders often look at the value of the business to assess creditworthiness. By tracking valuation as a KPI, you can maintain a good financial position to qualify for loans or lines of credit, especially when planning for growth or expansion.
Purpose First Advisors specializes in helping business owners Value Acceleration Plans that allow them plan and execute strategic growth. Start your FREE Business Valuation and 1-hour consultation here.
