You’ve been reading our series and have decided to do some exit planning. Check.
Now it’s time to have a valuation specialist estimate what the value of your business is today. Are you ready for this? Here’s what to expect and how to prepare for a strong business valuation.
What Valuation Experts Need to Do a Business Valuation
Business valuation is a specialized service, so you’ll need to hire an expert and prepare the data they’ll need to review. Overall, they need a comprehensive understanding of your business’s financial, operational, and strategic factors to determine its value accurately.
They will review the following information:
- Financial statements. This includes income statements, balance sheets, cash flow statements, and your most recent 3 years of tax returns. These documents show the business’s revenue, expenses, assets, and liabilities. Revenue and profitability. Your business’s revenue growth, current profitability, and future prospects for growth and expansion help determine both current and potential value.
- Market data. Looking at industry trends, competition, and customer behavior can provide valuable insights into a business’s value within its sector.
- Assets. While service-based businesses generally have fewer tangible assets like property, inventory, and equipment, your valuation will also consider intangible assets like patents and trademarks.
- Liabilities. Valuation includes information about the business’s liabilities, including outstanding debts and legal obligations.
- Intellectual property. As mentioned, patents, trademarks, copyrights, software, and other forms of intellectual property are considered assets that can add value to a business.
- Management team. In future posts, we’ll discuss how a valuation takes into consideration the quality and experience of your business’s management team.
- Market position. This includes your customer base and brand recognition.
If your business’s financial records are incomplete or insufficient for a professional appraiser to assess your business’s value in the first place, you must address this as part of your exit planning process. The good news is that doing so will also help improve your business’s performance. At Capital Concepts, we offer this type of support – high-level financial strategy, assistance cleaning up sloppy books, and guidance in implementing solid accounting practices.
What To Do To Prepare for a Business Valuation
If your books are a mess, here’s what to do (in addition to contacting us, of course).
- Clean Up Your Financial Records. This includes gathering all financial statements, tax returns, bank statements, and any other financial documentation that can help provide a clear picture of the company’s finances. Organizing financial records will also help the business owner identify any gaps or inconsistencies that must be addressed.
- Engage a professional finance team. Even if you understand accounting principles and are trained in bookkeeping and finance, you are the business owner. You need others to handle the strategic financial oversight and day-to-day bookkeeping. We recommend a team including an accountant to analyze how your business has performed in the past, a CFO to help improve operations and create a strategic plan for your financial future, and a bookkeeper to record all transactions. You can engage all of these on a fractional basis. Ask them to identify any issues or discrepancies so you can address them. If your finances haven’t been properly documented in a long time, expect this to take several months and to uncover many other issues that have been hidden by sloppy record-keeping and vague strategies.
- Implement consistent bookkeeping practices. It’s essential to record and categorize all financial transactions properly. You cannot run reports, create accurate forecasts, or make informed decisions without current accurate data from your business. You may need to hire someone to handle this (as described above), implement a better bookkeeping system, or both, depending on the current state of your books.
Strengthen Your Financial Position
To position your business for the highest possible valuation, consider implementing the following:
- Improve cash flow management. As the business owner, one of your responsibilities is maintaining sufficient cash flow to ensure that the company has enough cash on hand to meet its financial obligations. Some solutions can include negotiating better payment terms with customers and vendors, reducing expenses, and/or exploring financing options.
- Develop a business plan. Developing a comprehensive business plan can help the business owner identify areas of the business that need improvement and set goals for growth. A business plan can also help attract investors or lenders by demonstrating the business’s potential.
Whether you need a business valuation now or later, improving your financial management is always wise. The information that updated records provides enables you to make informed decisions about your business. The end result is a strong business that performs consistently, demonstrates value to prospective buyers, demands a strong valuation, and ultimately sells successfully and supports the next chapter in your life.
Interested in an assessment of your business’s strengths and opportunity areas? Request a complimentary review here.