A business is often the largest and most important asset in a person’s life, and its value can be the culmination of their life’s work.
For this reason, when considering one’s exit strategy, bringing on board a strategic partner/investor, or raising finance it is essential to have a professional and realistic understanding of your business’s value. In addition to this, an ongoing understanding of your company’s value goes beyond a purely transactional tool, and can allow you as a business owner to identify the specific areas and variables in a business that create or destroy value, and put in place a targeted strategy.
Many business owners run their business based on variables that, whilst important for operational purposes, are not necessarily value-driving. A firm and comprehensive understanding of value may inform strategic and tactical decision-making.
In order to appreciate the importance of a professional valuation, it is imperative to understand what a company valuation is, as well as the various elements that contribute to the generation of a high quality company valuation.
A company valuation is the process and procedure used to evaluate the individual elements that make up a business in the context of its competitive position within its market or sector as well as its future growth trajectory with the purpose of estimating the economic value of the company.
Company valuation is skilled and highly technical work that requires a thorough financial knowledge. As a starting point, valuation requires a detailed understanding of a company’s cash flow, income statement and balance sheet as well as deep insight into the company’s business model and growth strategy. Beyond the individual company’s financials, accurate valuation also requires a good understanding of the specific markets and sectors within which the company operates, as well as broader macro-economic factors. Further, there are also a number of factors outside of the company’s traditional numerical parameters that influence what a strategic buyer would be willing to pay for a company.
Moreover, there are numerous different valuation methods that can be applied and their appropriateness changes based on the structure of the company and the industry that it operates in.
Armed with this knowledge alone, it would be possible to generate a theoretical valuation of a particular company. However, as I have seen on numerous occasions in my career in Equity Analysis and M&A consulting, there can be a stark difference between a valuation prepared on an academic basis and the true value that a company would sell for in the market.
It is therefore crucial when generating the valuation that there is an understanding of the multiples that companies are selling for in a particular industry or the risk premium a particular type of buyer places on a particular sector or type of company. For this reason, experience is key and can mean the difference between a valuation that is useful and finds application in a variety of situations, and one that undervalues a business or conversely creates unrealistically high expectations that can compromise a potential transaction.
At Elk Advisory, we marry a thorough knowledge of valuation methodology with experience in the industry to ensure that the valuation provided to our clients is realistic, comprehensive and useful.
Contact us through our website www.elkadvisory.com to discuss generating a company valuation for your business.