Importance of Business Valuation Post-COVID-19

We are often asked, “why do I need a business Valuation?” The traditional answer would be to resolve tax or legal issues. But business valuations are far more than that, it is an art form as much as it is a science. Contrary to what many think business valuation is as instrumental as cash flow is to a business and it serves so many diverse purposes that many tend to overlook or ignore. 

Before moving on the many ‘purposes’ of business valuation, let us first take a look at what is business valuation really and how does it work?

Business valuation is a set of analytical techniques used and applied to define and estimate the economic and fair market value of a business or company. There are three known approaches used to value companies. 

The Income Approach -  The income approach, benefits the owner of the equity by bringing future value and benefits to the owner. This is done through discounts with minimal risks. The most common method with the income approach includes capitalisation of cash flow and discounted cash flow methods.

The Market Approach -  The fair market value approach is determined by reviewing actual transactions and comparing it to the assets of other companies. The M&A and stock market activities are also considered to obtain value and measures when applied.

The Asset-Based Approach - This approach is used when a company is not existing, or when a company exists but it's going into liquidation and its assets are tied to the company’s tangibles. The Asset-Based approach also provides a check when reviewing the concluding value under the income and Market Approaches.

Let us now take an in-depth look at the much-awaited question especially post the COVID situation where many businesses have and are still turmoiled. 

The second instinct that comes to a business owner’s mind when we talk about business valuation apart from resolving tax and legal issues includes but certainly not limited to selling or acquiring a business. 

When a major company poach you to buy-out your company, they expect you to be able to demonstrate the value of your company as a whole. They expect you to showcase how your business has grown through the years and how it can continue to grow. And it is very important for business owners to understand that major corporations will always attempt to acquire your business or merge with it for as little money as possible. 

Hence valuing your business according to IPEV (International Private Equity and Venture Capital Valuation) standards will not only allow you to define your fair market value but also give you leverage to negotiate your way to the appraised valuation numbers of your company so that you walk out with a deal that is up to your worth and not the other way around. Especially in such an economically difficult phase for many businesses, many major corporations will try to seize the very opportunity that many small businesses are dried out and desperate to get the cheapest deals and not insuring your position might represent a big loss for small business owners trying to sell at their own expense. 

Another well-know purpose of business valuation is when owners attempt to raise strategic capital. When you seek for additional funds to grow or sustain your company from a financial disaster, investors are going to want to see a genuine and complete company valuation report. Any investor will undoubtedly want to see where their money is going and how it is going to be utilised and most importantly how they are going to recoup their ROI (Return On Investment). And a clear and genuine business valuation will allow any investor to gauge into your business analytics to define how likely and investment-worthy your business is. 

The extensive economic changes provoked by the COVID-19 crisis have inevitable forced many businesses to redefine their strategic options and the most accurate way to do that is to have a thorough and genuine professional valuation in order to evaluate whether one should sell, merge, close or to keep investing in the business and if so, where and how much to invest. 

Having covered the much-widely known purpose of business valuation I really wanted to stress on the lesser or rather the much-overlooked yet instrumental purpose of business valuation in the smooth functioning of a successful business or company. 

While the majority associate valuation to only resolving taxes and legal issues and/or for when one needs to sell, buy or raise fund, which is absolutely fine and significant, business owners often fall into the trap of believing that the essence of business valuation is only limited to the aforementioned points. In fact, professional valuations serve a much wider and bigger purpose in a business life-cycle and if used effectively, can represent a powerful management tool to one’s business or company. 

For example, let’s assume here that a business valuation is like getting an annual medical check-up at your regular doctor’s cabin, you could think of your valuation as a health metric for your business that serves as purpose to measure your business’s blood pressure. That’s actually the closest I could get to make sure that whoever is reading this is perfectly aware and grasp the very notion of the concept accurately. Setting goals for your company can be great but to actually go about working towards those goals and objectives can turn out to be a real nightmare especially when you don't know where to start. Hence a business valuation helps to set a baseline about where you stand currently and what needs to be done to get the point you have set. Without a proper baseline, you are as lost a wrecked sailor without a compass in the middle of the ocean, having no foolproof evidence of how you are currently doing makes it extremely risky for your business moving forward. And again especially during this current crisis, diving forward blindly through trial and error can be extremely costly to one’s business. 

Additionally, valuation can help you determine specific ways to improve your business. If your business has been hugely affected by the uproar of the COVID-19 and if like many you are considering to sell or merge, a clear business valuation can hugely impact your decision, as your valuation report showcase alternative ways to reinvent your business and sustain it otherwise, It can also bring you to realise how an expense can be reduced and leftover funds can be put to better use elsewhere. In short, a business valuation can assist a business owner with the decision they would otherwise have a hard time deciding and actually save one the pain or mistake or making the wrong move at a decisive and critical time.

Valuation helps to measure one’s progress and can identify gaps to be rectified in time. Performed regularly, a business valuation allows one accurately measure how their business is doing compared to the initial path set and hence provides on with a realistic report of whether or not they are in line with their initial pre-set goals and milestones and if not they can re-adapt their trajectory to increase their value.

I candidly believe that valuation is a powerful tool to manage a business as its very purpose if to track the effectiveness of one’s strategic decision-making process and provide the ability to track performance in terms of the estimated change in value and not just in revenue. It helps an owner take a holistic look at his business to make crucial decisions that can be highly impactful for his bottom line. Professional valuations give room for one to understand the subtle dynamics of one's business and avoid unexpected consequences of seemingly insignificant decisions. 

We live in a day and age where entrepreneurs no longer want to sustain the same business for 20 years and the ultimate exit strategy for the majority of startup today is to create a worthwhile project that can sell easily in the next 6-10 years and then they move on to invest into another project. Therefore a regular valuation of such types of businesses can be a great win for when the time will come for these startups to sell as it allows the entrepreneurs to constantly assess its value and keep on upgrading its value in line with his exit strategy so that when the time has come to finally sell the business, entrepreneurs are sure to recoup much more than he had actually planned, since other the years he has closely and strategically built and grown his business for this very moment, creating worthwhile tractions that will be irresistible for any major corporation looking to acquire. Just like Steve Jobs did with Next, he built Next with the sole purpose and objective of having Apple buy-in at some point, he has measured every specifications and requirement that Apple will need and has to build his product and positioned it as THE only thing that Apple would need and would no other option than to abide by his term, this is called strategic benchmarking. 

Truth be told, valuations serves a much greater and powerful purpose and goes well beyond “ what someone will be willing to pay for your business.” If used adequately and intelligently, business valuations allow you to understand the inner-workings of how your business is performing. Those valuable insights give your business a competitive edge and increase your value and overall performances. 

One key point to take out from this write-up would be for business owners and entrepreneurs to clearly understand that a business valuation is not to be performed every 5 years or just when you’ll need to define a strategic option, but rather every year if not every 6 months. This can be a real game-changer to any business, regardless of its size or industry. 

While business valuations might appear to be extremely lengthy and quite costly to perform every six months, InstaVal has the perfect tool to address this issue for any business owner. Our product is in line the IPEV ((International Private Equity and Venture Capital Valuation) standards and delivers detailed intelligent valuation reports in not more than 10-15 mins and a fractional rate. 

If you are among those who truly desire to scale your business effectively and effortlessly and make sure to keep track of your performances as well as making sure that you are tapping into every market opportunity in real-time by having a regular valuation of your business? I invite you to check out our offering at www.instaval.co, you’ll be surprised to learn how organic, easy and accessible our valuation processes are.