Whether you’re starting a business, growing a successful business, bringing a business to the public market, or thinking of acquisitions or succession, valuing your company has significant advantages in terms of business strategy. It is something like a health checkup for a person, providing a helpful profile of where the good news is and outlining any corrective action needed at a certain point in time.
Pinpointing Strengths and Highlighting Weaknesses
Valuation will often pinpoint strengths that business owners may have missed, and may uncover weaknesses that need to be addressed. In every case, it will assist in maximizing the information that business leadership can bring to decisions.
For example, valuation can highlight areas where revenue is strong. Most business owners know where their prime revenue generators are; however, valuation can unlock more value, by suggesting where the market conditions may be replicated with little further outlay, for example. Further revenue, of course, can augment both profits and cash flow, two leading indicators of a healthy business.
Areas of potential cost reduction can also be uncovered by valuing a company. As business leadership is well aware, weaknesses can be overt, such as losing customers or dropping sales for long-time products. But sophisticated analysis can also unearth weaknesses that are simply lack of optimization. Can your operating costs be reduced with a few relatively simple steps? Could your workforce be made more productive through training?
Valuation will also help you identify your key strengths. Is it your brand recognition? Your loyal customer base? Your employees? Identifying strengths helps you plan strategically and focus on unlocking and maintaining your strengths.
Valuing a company can increase potential market valuation if the company goes public.
Managing Risk, Debt, and Funding
Finally, valuation helps companies manage risk. Valuation determines the company’s transferable value should it be sold or go on the public stock markets. That might be different than the value you’ve placed on it. You may have considered long-time, repeat customers a high value. But if just a few repeat customers drive a significant percentage of your business—more than 50%, say—then that value may actually be a risk. What happens if they suffer in a downturn or embrace a new product? Multiple clients reduce your risk.
Finally, if you need more capital, valuation can provide another measure by which to measure debt’s long-term risk versus reward. The cost of new capital can be conceptualized as what it provides in terms of value rather than absolute cost. Armed with an appropriate valuation, business leaders can determine whether the debt is paying for itself not in real terms, but in terms of value.
Finally, company valuation can give you access to investors of all stripes: a limited number of private ones, a fund, or wider public markets. Investors can provide funding and expertise, so being able to tap capital is a highly beneficial thing at all stages of the game. Valuation provides a benchmark that offers potential investors transparent information with which to make their decisions.