Many times, people misunderstand business valuations. Most individuals are aware that boosting a company’s intrinsic worth is essential to drawing in clients, investors, or buyers. But how does one go about doing that? What characteristics really add value to your company? By providing the answers to these queries, your organization’s genuine value might be revealed, turning it into a commodity that could be sold for a healthy profit.
If you are considering retirement and planning an exit, consult a skilled accountant in Bellevue, WA, or a finance expert to assess the true worth of your business.
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What’s Business Valuation?
Business valuation is the process of determining the true value of your business. In this process, assets, liquidity, departmental costs, stakeholders’ equity, and the ownership stakes of all core members are assessed. The Internal Revenue Service may request a business valuation for taxation purposes. A business owner or CEO can also perform this to improve financial health or make a necessary transition for the next generation. A business valuation is crucial during mergers or acquisitions when a big corporation takes over your business. You can get assistance from the finance or accounting team to evaluate the exact value of the business in the external market.
Price and Value: The Disconnect Between Buyers and Owners
While purchasers and investors tend to concentrate on other aspects, business owners frequently highlight and overstate their selling price. The return on investment is what matters most to investors and buyers. Many companies that don’t have much value have the potential to be profitable. An investment banker or buyer looks at the future after analyzing all fundamental aspects of the company, including its products and services. In this case, if one or more factors (such the company owner or a best-selling product) are altered, profits and earnings fall. On the other hand, highly valuable businesses with low debt levels are scalable and totally transportable.
A prospective buyer will consider factors like the quality of goods and services, the viability of the business, intellectual property, management strengths, and customer base. This is the primary reason Warren Buffet wrote in a letter to his fellow partners: “Price is what you pay; value is what you get.” From the buyer’s perspective, it’s evident that building a business with high value requires more investment than the market may suggest.
You also need to consider an appraiser’s perspective and how they view your business valuation.
What Makes a Company More Valuable?
The following factors, in no particular order, are common in many successful and valuable companies:
- Second-Tier Management: Can you go on holiday, leaving your business behind to enjoy your weekend? If the answer to this question is a straightforward no, your entire organization is self-reliant. However, if you have a skilled team of managers who can handle the work in your absence, your business is much more valuable in the eyes of buyers and investors.
- Recurring Revenue Streams: This is the holy grail for most businesses. Company owners integrate repeat contracts and subscription models, which are highly beneficial. This approach generates more automated revenue; the more you do this, the more your business’s worth will increase.
- Long-Term Contracts: This involves owners signing long-term service contracts with customers and benefiting only when the agreement is profitable. This strategy can add value to your business, as committed customers ensure a steady revenue stream.
- Focus on Customers: Not only marketing, sales, and revenue numbers, but how you retain customers also contributes to your business’s worth. Don’t just serve a few or low-budget customers—reach out to larger customers as well. Take on multiple projects, and no one customer should represent more than 5% of your net sales.
