If you're considering getting a small business valuation, you're not alone. The primary reason small businesses are appraised typically has to do with selling the company or another type of change in ownership, such as passing it to the next generation. But if that's all you use a business valuation for, you're missing out on some serious benefits. Here's a quick look at the many benefits your company can gain outside of the negotiating room.
How can your company benefit from a small business valuation?
It's fairly common for a company to have a business valuation performed when a change in ownership is about to occur. This helps the departing owner know that they're getting a fair value for the business while the incoming owner knows that they're not paying too much for their new business. But the amount of information that is explored during the valuation process makes it an excellent tool to help you gauge whether your company is on the right track and performing up to its potential. How?
The valuation process starts by looking at a company's finances. The appraiser will look at potential transactions that will need to be recorded to normalize income and expenses to reflect the reality of the business, rather than rare high sales and significant expenses that skew your company's financial picture. It also looks at where your company's finances stand overall, giving you a better idea of whether you have a normal number of slow or bad debts from customers or if you need to crack down harder to get paid on time.
Next, it looks at your company's operations. Is your business a leader in innovation and development in your industry? Is it running efficiently, or are there areas where improvements could be made to optimize your profitability and lower your overhead? The appraiser deals with companies like yours every day, so they can often provide strong, valuable insights into where your operation could be improved to optimize your productivity and profitability.
What about your company's place in the market? That's the next area that is typically explored. Does it have a strong reputation as a thought leader in the industry? Is it unique in particular areas that add value to the products and services you offer your clients? If you do have areas that are similar to competitors, those will be appraised as well as the areas where your company is truly unique.
Then there's the market itself. Is it currently growing, stagnating or shrinking? It's easy to get caught up in what your company has been doing in the market, but it's also important to know where it's going in the future. When the appraiser looks at your industry, they'll take into consideration any professional projections about future growth in the industry.
A small business valuation is a valuable tool that can be used to drastically improve your company's operation, performance and bottom line. However, if you aren't using a certified business valuation specialist for the process, you may be getting the wrong information. The certification process helps educate appraisers as to the proper approaches and methodologies to be used in a wide range of circumstances. Ensure that the money that you're investing in a business valuation is being well spent by using a certified business appraiser.