How much is your business worth?

There are many reasons that you might want to know how much your business is worth.  For example, small business owners may get a valuation in order to access capital to scale or sell the business, while larger businesses may do it for financial reporting or tax purposes.  Valuations may also be done as part of divorce settlements or in transactions with potential investors. 

“Valuation is essentially the art and science of determining the worth of an asset. It’s about the highest price this entity could fetch in the market,” explained Chartered Business Valuator and Managing Director at Become Investible, Kevin Valley.  He was speaking on #MoneyMovesJa with Kalilah Reynolds.

Valley said a valuation would be the starting point of a negotiation between a business owner and other interested parties including investors or auditors, as it provides a defence for the worth of the company.

Different approaches to valuation

He said valuations are usually done on either a liquidation basis or a going concern basis. Liquidation valuations are done for businesses closing down that are not expected to generate profits in the near future for investors. The going concern basis on the other hand relates to businesses expected to generate healthy profits for investors in the long term.

Valley said under the going concern basis, there are three approaches to determining a company’s worth.  The most popular is the income approach, which speaks to future cash flows, profits and cost savings of a company.

There’s also the market approach that looks at where companies similar to the business currently trade on the public stock exchange, or the price point where similar private companies have been sold in the market. 

Additionally there’s the asset of cost approach, which Valley said assumes substitution. 

“That is saying that a market player will not necessarily want to pay more for a business than it would cost to reconstruct that business himself so you look at replacement cost and that sort of thing,” he said.

Defending your valuation

According to Valley, there are seven main factors that can be used to create a sound defence for a company’s valuation. 

At the top of his list was the market environment which includes the economy where a company serves or has customers. It also covers the industry to which a company belongs.

“For example, if a company has offices in Jamaica and Trinidad and Tobago, you would want to look at the forecast economic growth rate in both Jamaica and Trinidad….  For industry, we talk about competitive advantage, headwinds and tailwinds. Headwinds are trends that can go in favour of your business and tailwinds push you forward,” said Valley.

Meanwhile, the valuator said management also plays a key role in determining the worth of a business. Also important to the process are cash flows and the cost of capital. 

“Cash flows include revenue generation, product market fit, how are you meeting with customers to keep them coming back, expense control, how is the relationship with suppliers, how are you paying team members…. [while the] cost of capital is based on capital, how much debt you have in the business, how much equity and the company-specific risks,” he said. 

Valley added that having reliable financials are also critical to the process, noting that this documents the asset base of a company. He said a company’s physical assets can be used to calculate the minimum value of a company.

“That would be like the floor level of your valuation,” he said, adding that business owners can also include trademarks in their financial reporting because brands have value in the marketplace.

Valley’s last two factors relate to strategy and systems. He said it’s important for companies to conduct strategic planning, reviews and financial forecasts as well as keep track records to ensure projections are being met. He added that operational systems and procedures, when put in place, also help to determine the life of a company while protecting customers.

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#MoneyMovesJa with Kalilah Reynolds and EXIM Bank premieres Wednesdays at 7pm on YouTube and kalilahreynolds.com

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Visit EXIM Bank’s Business Advisory Service at:
https://eximbankja.com