Why it is important to know the value of your business

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A properly considered business valuation can be the first step in many essential business processes and activities. Although there are many examples, these might include procurement of a buy and sell policy or facilitation of a business restructuring process, for instance.

Initiating negotiations during a sale of business transaction, probably remains the most common business valuation trigger however, and for many business owners, such event might be the first and only time the thought of having a business valuation performed will occur.

Business valuations are therefore often treated as the end, rather than the means to an end.

Growing a successful business requires an enormous time investment. When doing it right, this investment is justified however, since no other investment has the potential to reward your time investment over the long-term, better than a successful business. For this reason, we have always found it peculiar when business owners are willing to wait until just before sale before deeming it important to quantify the value of their plans, time (often years), efforts, etc.

This is probably where the value of proper valuation is mostly overlooked – we tend to view valuation as the end while it should maybe rather be viewed as a guiding key performance indicator on the journey to comfortable retirement or eventual exit from a business, regardless of what the reason for exit might be. Valuations should be the means to an end, employed to help inform decision making and strategic process, not when you are ready to sell, but rather while it is still possible to make positive adjustments to your business.

In this context, we generally advise that a business valuation be performed at least on an annual basis, even if only employed in internal processes, as a key performance indicator. By taking this approach, performance and growth can be measured periodically while the necessary strategic and operational adjustments can be made while there is still time to build value through good and prudent business decisions.

Having said this, it is important to note that the value of a valuation is limited to the quality of its interpretation and application. It is important that a valuation instructs focussed action, and it is therefore always a good idea to involve a trusted and experienced financial advisor in your strategic, as well as financial processes.

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