Business-Owner

Use a Baseline Business Valuation to Determine What Your Business is Worth

Christopher Sheridan

What is your business worth to you, to a third party, to your family, to your employees? You have built this business from the ground up, or acquired it many years ago, and turned it into the successful business it is today. How do you put a value to something you have dedicated your entire life to?

It is hard to plan for the future if you don’t have all the facts. With a baseline business valuation you can operate from a position of strength, because you’ll be relying on facts rather than estimates or opinions.

What is a baseline? A baseline is a fixed point of reference that is used for comparison purposes. A project’s results would be measured against a baseline number for costs, sales and all other variables; to determine if it was a success. Your company should be treated the same way you would treat a new project or venture. In order to determine a baseline of a business, a business valuation needs to be performed.

A baseline business valuation, prepared by an independent third-party will provide you with an objective view on where your business is today. A business valuation advisor will conduct a financial statement analysis. This analysis involves common size analysis, ratio analysis, trend analysis and industry comparative analysis. The advisor will use this financial statement analysis to compare your business to the other businesses in the industry. The value of the business is based on not only the multiples similar businesses in the industry are selling for, but it is important to determine the business’s annual cash flow. It may be determined that your business is performing better than the industry and has substantial more annual cash flow. In the end, a baseline value is determined.

Once a baseline business value has been determined, it is time to look to the future:

  1. Goal Setting. We can look to improve the business through setting goals to increase revenues, cut costs, increase the bottom line, add divisions or add products/services. On an annual or semiannual basis, an updated business valuation can be performed. You can then compare the new value determined for the business, after your goals have been set and strategies implemented, to the baseline business value to measure the performance and see if you reached those goals.

  2. Increase Value. In order to improve the overall value of the business, it may not be all about the bottom line. You can increase revenues and cut costs, improving the business’s net income, but that may not be the ultimate driver of value for your business. We may look to increase the overall cash flow, acquire new equipment, pay down outstanding debts, add divisions or acquire other businesses.

  3. Exit Planning. You may have no intentions on selling your business today. Suppose you are unexpectedly approached by a potential buyer and they make you an offer on your business. It is imperative to know the true value of the business, to make a proper decision on the offer.

Perhaps you are not planning to sell the business, but rather pass it down to a family member or employee. Passing down the business involves several complicated issues, such as how to logically divide the business and allocate value. Business valuations help owners establish a baseline value that they can use as a springboard for future planning whether stock is intended to be purchased, gifted or inherited. Read more about succession planning here.

The business valuation advisors at Yeo & Yeo CPAs & Business Consultants can review your company’s financial position and determine its value. A valuation advisor can help you, your family and your attorney customize solutions to meet your goals and special needs. Read more about business valuations here.

Expect the unexpected. No one knows when their plans will change or what unforeseen circumstances may come along the way. Be prepared and confident for the future to come, when you know the true value of your business.

 

Christopher Sheridan

Christopher Sheridan

CPA, CVA

Christopher serves in the Management Advisory Services group. He is a member of the firm’s Business Valuation and Litigation Support team and the Manufacturing Services team. His areas of expertise include business consulting and accounting software consulting, financial reporting and tax issues with strong emphasis in the manufacturing, retail and wholesale sectors. He is a manager in Yeo & Yeo's Saginaw office and a Certified Valuation Analyst. Contact Chris at chrshe@yeoandyeo.com or 989.793.9830.