5 Reasons you should Know the Value of Your Business

A recent study by Mass Mutual showed that, on average, business owners believe their business to be 59% more valuable than it really is. This is a problem on several fronts and can lead to major disappointment when it’s time to exit or sell the business. Fundamentally, we’ve identified 5 reasons why every business owner should know the value of their business at all times.

1. Set Realistic Expectations

Knowing the value of your business will help you set a realistic expectation of what to expect when you sell or exit your business. Don’t be surprised when you find out too late that your business is not worth what you thought, or need it to be.   

2. Understand Value Drivers

Every business has characteristics that can attract buyers, and also drive them away. We call them “value drivers”. A proper business valuation will analyze these non-financial factors and score them for your business. A sample of these value drivers includes the rate of growth, customer concentration, working capital, recurring revenue, customer satisfaction, and the extent to which the owner is involved in the business. Any one of these can enhance or spoil the circumstances around your exit.   

3. Scenario Plan

Once you know the value of your business you can work with your team and advisors as necessary to project out future revenue, EBITDA, and margin goals, all of which have a significant impact on business valuation.  

4. Develop Actionable Items

With financial goals established, you can begin the process of developing actionable plans to help you reach those goals. Performance benchmarks, periodic review, and ongoing tweaking of the plan with team engagement will go a long way toward helping you build a more valuable business.   

5. Sellability

Wiktionary defines the word “sellability” as the ability to be sold. Committing to the initiatives in steps 1-4 will position your business to be sold with maximum buyer interest. This in turn places you in the desirable position of being able to entertain multiple parties of interest and select a buyer who brings the perfect combination of cash, terms, and conditions to ensure the legacy of the business you’ve built.  

Having your business valued on a regular basis is a sound business practice that can lead to a more valuable and enjoyable company to operate.