Why it pays to know what your business is worth

The most valuable asset most business owners have is their company. Yet relatively few know its actual market value — and, by extension, their overall financial standing. Business valuations are generally associated with major life events like selling the company or taking on a new partner, but having an objective measurement of your business’s worth can also provide insights that help you make better business decisions.

“A business valuation gives you the opportunity to look inward for possible operational efficiencies and other improvements,” says Jim Cohill, Director of Business Banking for New England South at Citizens. “It can also give you an opportunity to see what your competitors are doing and how some of your metrics compare to industry standards.”

Learn more about the valuation process and how to use the findings.

Understand the main valuation methods

Several different approaches can be used to determine a business’s worth. A valuation professional will often use a combination of these methods to arrive at an accurate figure. These approaches are based on:

• Business assets: In this approach, liabilities are subtracted from assets to measure a company’s worth. Because a business’s true value typically goes beyond its assets, this approach may be a starting point for a valuation.
• Earnings: Earnings-based valuations are the most common of the valuation methods. In one common approach, called multiples of earnings, a business’s earnings are multiplied by a number that is based on the industry, location, assets, and other factors.
• Market-value comparisons: These methods measure the worth of a business by comparing it to similar businesses that have recently sold. The effectiveness of this method depends on how many similar businesses there are on the market.

Though an actual valuation will be more complex than these basics, these descriptions can help you know what to expect.

Find the right professional

Certain valuation approaches are better suited for particular industries, so it’s critical to choose a certified professional with expertise in your type of business. Your bank may be a good starting point. You could also check with the American Society of Appraisers or the National Association of Certified Valuers and Analysts — both offer online directories that you can search by location and area of expertise.

Cohill suggests taking time before a valuation to determine what you expect the worth will be. That can give you a feel for how your own assessments compare with a neutral perspective.

“Review your operating accounts, debts, credits, and how much money is going in and out on monthly basis,” he says. “Also, think about where your business may be headed the next one to two years. Could there be shifts in the market or the industry that impact the value? These could all impact the valuation.”

Act on the findings

Use the valuation report to build on your business’s strengths and shore up areas of weakness. The report could surface opportunities to gain operational efficiencies or apply employees more effectively. It could also highlight aspects of your financial operating cycle that could be improved — for example, tightening collections or better managing payables.

Having regular valuations — Cohill recommends every two years — can help you set realistic expectations and find ways to continuously improve. If you plan to sell your business one day, this exercise can be particularly useful in helping you reach the outcome you want.

More Information

Interested in starting the business valuation discussion? There are many resources out there for obtaining a business valuation. We recommend reaching out to your accountant or banker to point you in the right direction.