Know Your Worth: How To Value A Business
Finding the answer to how much your business is worth can seem overwhelming and complex for many business owners, but addressing the issue is vital. It’s not enough to rely on anecdotal deal information or gut instinct. To truly understand the worth of your business and thrive in today’s changing market and in the wake of the COVID-19 pandemic, obtaining a formal valuation is key.
Why do business owners need a valuation?
The most common reason for obtaining a valuation is selling the business. A valuation can help you during the negotiation phase, to set a price that is neither too high nor too low. Even prior to the transaction process, it can help identify value enhancement opportunities to increase the worth of the business.
A valuation can also help with raising capital for strategic acquisitions or expansion. It presents banks and potential investors with an accurate illustration of your company’s performance, ability to take on debt, and capacity for growth.
What are the key factors in a business valuation?
A number of factors—internal and external, tangible and intangible, quantitative and qualitative—can determine the value of your business. While these may vary according to the industry and type of company, the following are common examples.
Market conditions and trends – Average multiples and valuations can fluctuate across different industries. Consider your company’s degree of sensitivity to the market and economic factors, such as new legislation, foreign exchange rates and tariffs, interest rates, energy costs, GDP growth, workforce changes and skill shortages, customer trends, and more.
Financial performance and outlook – Historical net revenue and quality of revenue are measurements of profitability and business strength. Outlook is equally important. Projections for growth and future earnings should be realistic and demonstrate the company’s sustainability.
Products and services – Are the products and/or services your company provides in demand? What are the current and expected market and customer trends? Do you fill a niche that differentiates you from your competitors? Are there opportunities for diversification through new products or specialized services? All of these considerations can affect the worth of your company.
Brand – Brand position is an intangible valuation factor, but an important one nonetheless. Your company’s reputation in the market, quality of offerings, and ability to provide a good customer experience all support bottom-line profit—and therefore, the value of the company.
Management and employees – A workforce that is skilled, agile, and experienced can contribute to your company’s value. Your leadership team in particular can affect a valuation. Managers with strong industry experience and a track record of driving growth can mean less risk for a buyer—not to mention, offer greater potential for future profitability.
Technology and equipment – Where does your company sit on the digital maturity scale? A business that is digitally advanced can be worth more than one that requires investment in modernization. Consider aspects such as cybersecurity, customer relationship management (CRM) programs, mobile or e-commerce capabilities, back-office systems, physical equipment, etc. Any proprietary technology your company holds can also be a value driver.
Being technologically advanced isn’t limited to hardware and software. Having a workforce and a company culture that embraces the digital mindset and adapts quickly to change is key.
Customers and clients – For B2B and service-based companies especially, the strength of your client relationships and customer loyalty is important. A valuation will examine customer contracts, demographics, retention rates, market size, and more.
Consider the size and diversity of your customer or client base as well. A business that is highly dependent on just a few customers can present risk, which in turn can lower the multiple.
The buyer perspective
Part of understanding your company’s worth means looking at the business through the eyes of a potential buyer or investor. Some of the questions they may ask themselves include:
- How has the pandemic affected the business?
- What is the financial health of the business? How has it performed over the last three to five years?
- How does the business align with current and projected market trends?
- Is there a strong team in place that can lead the business?
- Does the company offer opportunities for greater efficiency?
- Are there areas that need investment or upgrades?
What should business owners do next?
Knowing the worth of your business can help you get a big-picture view of your company’s strengths, weaknesses, threats, and opportunities. Consider these next steps:
1. Brush up on market trends – Staying aware of the trends, disruptions, and market fluctuations in your sector is crucial, especially for industries where the pace of change is more rapid. Political, social, and economic factors can all affect the value of your business.
2. Determine your goals – What is your next step in the business life cycle? Is it selling the business or transitioning ownership to a successor? Is it expanding to new markets or making an acquisition? Or is it reinvesting for digital transformation or other growth initiatives? Identifying your objectives from the start can help guide the valuation process.
3. Take a proactive approach – Waiting to get a valuation until there’s an offer on the table puts you and your business in a reactive position—and the risk of accepting an unfavourable deal could be higher. Starting the process early can put you in a better position to reach your goals.
4. Engage a professional valuator – An experienced chartered business valuator (CBV) can assess your business’s unique attributes and market position, find potential buyers or investors, and guide you through the transaction process.
How BDO can help
The BDO Valuations team provides accurate, credible valuations to Canadian companies across a broad range of industries. We work closely with you to understand your business and leverage real-time market data and industry benchmarks in our assessments. Whether your goals include selling the business or expanding to new markets, we can help you identify opportunities and build a strategy.
The content of this website, including the articles, is provided for summary informational purposes only, and should not be regarded or relied upon as advice, either generally or with respect to any particular or specific situation.