How To Determine The Value Of A Small Business
If you were interested in getting a valuation for your company 5 years ago, your best choice would be to hire a recommended valuation company. That company would ask for the detailed documentation and spend lots of time over the next few months talking with you and your team. The valuation company would examine your business and render a report and a valuation that a buyer may depend upon for a sale price.
Even today, for some companies, this is the best choice if they are ready to sell or transfer their business.
What if you’re not ready for a full valuation – you need to know where your company value is today and how to increase that value for a transfer in the future?
In today’s high tech environment, getting a valuation is easier. Software is available to take the data, make an initial judgement, and give you an estimate of valuation.
And – the software can also let you know where you need to improve in order to increase that valuation.
All this – at a fraction of the time and money it takes for a full valuation.
Official Company Valuation Process
For a full evaluation, complete with recommendations that satisfy a buyer that the value is true, the following documentation is required depending on the type of company.
Holding Company
Five Years Of Historical Financial Documents
Asset statements as of the Valuation Date, including:
- Bank/checking account statement
- Investment account statement
- Real estate appraisals
Liability balances as of the Valuation Date, including
- Mortgage Note agreement/statement
- Promissory Note agreement/statement
Ownership table
Distribution History – amounts and dates of distribution
Operating/Partnership agreement
Most recent Tax Return
Operating Company
Five Years Of Historical Financial Statements, Including Detail On any One-Time Or Non-Recurring Revenue Or Expense Items
Interim financial statements
Three to five year projections, including:
- Capital expenditure requirements
- Working capital requirements
Ownership table
List of key members of management (tenure, title, responsibilities)
Copy of articles of incorporation, operating agreement, by-laws, and shareholder agreements
Copy of any recent board materials or company presentations
Trade association information, forecast or insights
The owner and the management staff would spend several hours with the valuation company staff providing answers and documentation to ensure a complete and accurate valuation.
Estimate Company Value
If you’re not quite ready for the time and effort it takes to do a full valuation, use software to get an estimate of your company’s value. You can enter the information that you have on hand – or grab your financial reports and give the tool more robust data.
It only takes about 30 minutes.
Using Quist Insights™ software, when you’re done with the questions, you’ll have an estimate of value and an Action Plan.
How Your Company Is Evaluated
There are several different methods to valuing a small business. They all consider the future potential of the company, risks and opportunities and earnings along with many other factors.
Common to all business valuation methods is consideration of the six Value Drivers.
Your action plan details the strengths and weaknesses of the Value Drivers in your business. Here are the six value drivers that make up your business valuation and your action plan.
Strategic Value
Strategic Value addresses industry dynamics such as barriers to entry, regulatory requirements, economic impacts, and technological changes within your operating environment. Competition, market share, and product substitution all impact valuation.
Buyers are interested in companies that are leaders in their industry, and have handled the challenges of brand awareness and technological change.
Organizational Value
Organizational Value encompasses a company’s culture and internal communication, systems, and processes. The internal structure of a company is the main defense in preventing fraud, workplace, accidents, and litigation. The culture of a company, although intangible, can undermine progress or propel your company forward.
To get the highest value here, have great documentation on your processes and a company culture that your employees respect.
Customer Value
Customer Value reflects the health of your customer base. A loyal and growing customer base is achieved when your business provides a value proposition in which customers receive benefits that outweigh the costs.
When it comes to revenue, customer retention is hugely important to consistent growth and financial performance. Customer diversification, repeat customers, and customer satisfaction are important indicators of the health of your customer base.
Buyers are interested in companies that are not dependent on one or two customers. Higher values here mean that your company retains their customers and your customers are satisfied and continue buying.
Employee Value
Employee Value considers the strength of employees, especially the management team. It looks at experience in the industry and tenure with your company. Most importantly, in small to mid-sized businesses, there is often a disproportionate amount of revenue generation, client relationship management, and leadership centered in one or two individuals.
In these cases, a “key man” discount is often applied to the value of a company because if the owner sells the business or leaves the firm, his/her value is not transferable.
This value driver scores high if you have a diversified and experienced management team.
Financial Value
Financial Value reflects not only the revenue growth and profitability of a company but also the financial controls and systems in place to manage the business. High-quality financial and accounting systems, associated data, and timely information output are essential to support growth, cash flow, and profitability and instill confidence in the financial activity of your company.
If your company has great financial controls and is growing profits, buyers pay more.
Environment, Social, and Governance Value (ESG)
There is a growing recognition that ESG integration is a fundamental part of doing business. The integration of ESG considerations into the planning and operation of companies to foster major innovation is contributing to the next wave of sustainable, global competitiveness and higher business valuations.
Is your company promoting social responsibility and environmental awareness with its suppliers and customers? The benefits of social responsibility are better reputation and brand awareness as well as higher employee engagement.
Better reputation and higher employee engagement results in a higher company value.
Use Your Action Plan
Based on your answers to questions, your relative strength for each value driver is calculated. If your company needs work in any area, the Action Plan explains what you need to do to get a higher score.
Follow the directions, increase your value driver scores and increase the value of your company.
It’s that simple.
You may not feel comfortable using software to create an estimate of the value of your company. Rest assured 30 years of experience is behind Management Insights™, Forward Insights™, and Expert Insights™ – the tools you can use to increase the value of your company.
When it comes time to hire that company for a full valuation, you’ll know that you’ve done your best to streamline the work and get the highest price possible.
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