Business valuation can provide valuable business insights

By: Suzanne Loomer July 1, 2008 12:00 AM - You likely know the value of your investment holdings. You may know the value of your home, your cottage, and most of your other major assets.
But do know the value of your single biggest asset?
For many business owners, their company is the most valuable portion of their net worth. Yet few owners know the true value of their enterprises.


If you are planning to sell your company or to pass it along to the next generation, to take on a new partner or shareholder, or to merge or reorganize it within the next few years, then you need to know its value. And you should also know how to maximize that value in order to receive the most benefit from any of these transactions.
A business valuation conducted by a chartered business valuator (CBV) can therefore be a worthwhile investment for many owners.
A valuation involves quantifying the worth of a company by assessing all of the tangible and intangible assets and liabilities that contribute to value.
A valuation can also be a meaningful strategic planning tool by helping you identify the key drivers of value and enabling you to focus your attention on these areas of the operation.
Following are some of the insights that you can expect from a professional valuation of your business.

Valuation reports generally include a description of recent trends in revenues, as well as earnings/cash flow of the business, usually over a five-year period. Such information can show whether earnings are volatile or trending upward or downward. The valuator may also describe the reasons for these variations, such as the company entering a new market or adopting new technology, or expanding the sales force. This can help you identify factors that may further enhance value or reverse unfavourable trends.

The valuator will also consider the factors that impact the quality of the earnings of the business. These may include for example, customer/supplier dependence, the impact of new competition, management experience, the condition of capital assets, etc. These are all factors that can increase or decrease the value of a business because they can affect the company’s ability to maintain its historical level of earnings or to meet forecasted results.

Valuation reports typically describe the market and economic conditions in which a company operates and the related factors that affect its value. Having a strong market position such as an established niche and superior market share, for example, would add value. On the other hand, being new to the sector or having significant exposure to pricing pressures or interest rates would reduce value.

A valuation report may also include information about recent market transactions and comparable companies. This can provide helpful intelligence regarding how the market views the value of similar businesses and can assist you with your strategic planning.
If you have had a valuation of your business in the past, a reconciliation of this prior valuation may help to pinpoint factors that may have led to an increase or decrease in the value of the enterprise. This will enable you to resolve problems or to build on successes.

There are three principal types of valuation reports: comprehensive, estimate and calculation. Since the scope and level of analysis varies from one document to another, the selection of the appropriate report depends upon its intended use. A valuator will tailor the level of detail to suit your needs, so be sure to communicate your specific requirements and expectations.
If you want to use the valuation for strategic planning purposes, ask the valuator about  priority issues and value drivers. He or she can also help you understand how these factors may be viewed by a prospective lender, purchaser or investor. You can then utilize this information to focus on enhancing the performance of your operation.
All of these are valuable reasons for investing in a valuation for your business.