Why and when should I value my business?
The need for business valuation arises at different stages of a business’ life cycle. Whether you’re in the first few years of growth or a mature business, different objectives will drive your need for a valuation. Doing this exercise gives you an idea of how your business is doing today, where it’s headed in the future and what needs to change/ improve for its long-term success.
Drivers for business valuation (why):
To answer your question for why should I value my business, some of the reasons are discussed below. Most of these would apply to an SME, while some are specific to larger organisations.
- Planning the next phase of evolution of your business – When your business reaches a certain milestone, e.g. reaching £1m in revenue, as a founder you start considering the next phase of growth i.e. how to take it from £3-5m to £10m or from £10m to £25m etc. At each of these key milestone, you may want to consider valuing your business. It helps you learn a lot about your business and gives you an idea of what is possible for you to achieve. You can also use this to plan the next phase of growth and set the future strategic direction.
- Preparing for Merger & Acquisition (M&A) – When you’re preparing for an M&A or get approached for it, the whole process revolves around the value of the business i.e. determining what a potential buyer will be willing to pay for it.
- Raising capital for business growth – When you’re seeking investment through venture capital, bank loans or angel investors, the present and the potential future value of your business plays a key role in determining the amount you can secure.
- Planning to exit the business – As a founder/owner, there comes a point when you want to exit the business. You would like to ensure that you get the appropriate financial return for the business you have established that reflects the true value of your business.
- On-boarding a new partner/ shareholder in the business – As your business grows and you bring in new shareholding directors, you want to be certain about the amount of equity in shares you offer as part of the remuneration package. This may require a business valuation to determine a price per share and total shareholder equity you want to offer.
- Buying out a shareholder or succession planning (release of shares) – Sometimes you may need to buy out a shareholder due to various reasons. To ensure both the parties are satisfied for what is being paid for the shares on offer, you may need to go through the process of business valuation.
- Creating an incentive programme for employees – This approach has mostly been used by companies both large and small to attract and retain employees. For SMEs in the UK, Enterprise Management Incentives (EMI) is one of the four HMRC approved employee share schemes that is quite suited for businesses with less than 250 employees. However, before launching any such scheme, you will need a to consider business valuation.
- Performing Initial Public Offering (IPO) – This is not something many SMEs have to go through or consider but business valuation is a key part of pre- IPO preparations.
When to start preparing for business valuation?
Whatever the reason may be for business valuation, it is best to start early to prepare for it. We recommend companies to prepare their business 18-24 months ahead of a planned or scheduled valuation, because:
- This gives you the time and opportunity to take corrective measures to improve business performance and align your financial reporting with the requirements for valuation
- Optimise and improve the different value creators that can help maximise the value of your business.
We can help you in not only identifying which value creators your business needs to optimise but also what corrective measure and improvement programmes you need to put in place to get the desired result. To discuss how you can optimise the value creators in your business, get in touch.
