Business valuations can be a complex subject. I have been valuing businesses for around 20 years and have had my fair share of headaches doing so. I’ve realised something crucial: to many business owners, valuations can seem like an enigmatic code, an intriguing and intimidating puzzle. But fear not, for I’m here to share some insights that might help you crack this code.
Let’s start off by addressing the elephant in the room: Why do valuations matter? In the grand scheme of business, a valuation is more than just a number; it’s a reflection of your business’s health, potential, and market standing. It’s the yardstick by which investors, buyers, and you, the owner, measure success. But understanding this number, ah, that’s the tricky bit.
Imagine you’re standing at the edge of a vast financial ocean, and a business valuation is your compass. Without it, navigating the waters of business growth, investment, or even a potential sale is like sailing without a map. It’s not just about knowing where you are right now; it’s about understanding where you could go from here.
Valuation, at its core, is a blend of art and science. The science parts – That’s the tangible stuff – your financial statements, cash flow models, and asset valuations. These are the bones of your valuation, the hard facts and figures that provide a solid foundation.
But here’s where it gets interesting. The art of valuation is about reading between the lines of these numbers. It’s about understanding their story–your business’s story. What’s your competitive edge? How strong is your market position? What are the threats to your success? What’s the potential for growth? These questions, while seemingly abstract, are the colours that paint the picture of your business’s value.
A valuation is looking at the business as it is now and predicting what it will do into the future. That’s why businesses are worth different amounts to different investors… it comes down to their vision of the future for the business. This is where things can get a bit tricky, but also quite exciting. Forecasting involves gazing into the crystal ball of your business’s future, predicting financial performance based on current trends, market conditions, and your real, actionable business strategy.
But remember, a forecast is only as good as the assumptions it’s built on. Be realistic, but also be optimistic. The future is not set in stone; it’s a horizon filled with possibilities. And your role? You’re the captain steering towards that horizon.
They say that there’s more than one way to skin a cat… which, if you think about it is a weird analogy, so let’s not think about it…, and there’s certainly more than one way to value a business. You’ve got your asset-based approaches, earnings-based methods, and the ever-popular market value approach. Each has its place, and understanding when and how to use them is part of the art.
The asset-based approach looks at your business as if it were to be sold off piece by piece. It’s a bit like valuing a car based on its parts rather than its performance. Earnings-based methods, on the other hand, focus on your business’s potential to generate revenue and profit. This is where your past performance and future forecasts come into play. And then there’s the market value approach, which compares your business to similar ones that have been sold or are on the market. Think of it as the real estate agent’s approach to valuation.
Here’s something I’ve learned over the years: Valuation is not just about numbers; it’s about people. Your business’s value is influenced by the people who run it, those who buy from it, and those who might own it. Understanding the human element – the motivations, the skills, the relationships, the ability to separate ownership and management – is crucial. It turns a cold, complex valuation into a living, breathing measure of your business’s value .
Cracking the code of business valuation isn’t just about understanding the numbers; it’s about understanding the story behind the numbers. It’s about blending the tangible with the intangible, the quantitative with the qualitative. But most importantly, it’s about understanding that this number—the value of your business—is more than just a figure on a piece of paper. It’s the sum of your hard work, dreams, and future potential, and understanding the ‘why’ of it is probably more important than the ‘how’ if you want to change that number before you decide to exit your business. .
When trying to understand the ‘why’ of your business’s valuation, remember that you’re valuer is not just a number cruncher; they’re a storyteller, a strategist, and a bit of a soothsayer. Knowing where you are now also lets you work out where you are headed, but it also arms you with the knowledge you need to change your heading, to change your story… and in doing so, unlock the hidden value of your business.