Exit planning is not something that should be undertaken in an afternoon. Ideally, it is a multi-year process. Whether you are gearing up for a sale, or preparing to pass your business along to the next generation, it is imperative to fully understand your business’ value and to do your best to maximize it before a change in ownership. A business valuation is the cornerstone of that process. Without one, you cannot boost your sale profits or arm the company’s future leadership with the insights they need to be successful.
Knowledge is power, and nothing is more critical to exit planning than understanding your position in the marketplace; the strengths and weaknesses of your daily operations and balance sheet; and the worth of your tangible and intangible assets (the latter of which comprise the bulk of most businesses’ worth and are notoriously difficult to value). A business valuation will guide you on whether the time is right to proceed with an exit or, more likely, if it makes sense to hold off until you address pressing issues that will serve as red flags and value detractors for potential buyers. Plus, business valuation experts are able to find value in places where accountants typically do not, allowing you to make a credible, independent argument for a higher sale price when the time comes.
First, consider your finances. Any potential buyer will expect to see at least three years’ worth of financial statements. Business valuations comb through your financials, normalizing your paperwork so that one-time expenses and occasional income fluctuations do not negatively impact your negotiations. Valuation experts are also able to provide you with insights on which debts should be paid down, areas of your operations where the cost overhead exceeds industry standards, business processes to streamline, and other issues that can be addressed prior to an exit.
In terms of assets, business valuations assess the worth of intangibles like brand recognition, patents, copyrights, client lists, talent, and other elements that have no book value. Valuations also help to preserve more of the value of tangible assets. The standardized depreciation tables typically used by accountants can rob companies from capitalizing on the value of depreciated assets that are still in use. Valuations include equipment appraisals that ensure you are able to list all of your relevant assets on your balance sheet accurately so that you don’t inadvertently shortchange yourself.
A business valuation also gives you a more concrete sense of where the market is headed, your competitive standing within that market, your competitive differentiators, and your firm’s future trajectory at the present time, as well as an idea of how those factors could change by making certain adjustments. Valuations remove the guesswork from exit planning.
No matter how much time and internal manpower you dedicate to the process, no company can accurately synthesize the information and factors that play into a comprehensive exit strategy as well as a third-party business valuation expert. Business valuations make a successful exit by giving you the opportunity to maximize your business, whether you are exiting in six months or six years.