Do you actually know what your business is worth? Seems a simple question but many struggle to answer it, says Mike Carter
Optimising the performance of their business is one of the key goals of entrepreneurs. Fundamental to this is being able to assess what their company is worth as it’s critical in making the right strategic and operational decisions for the company.
Yet of the estimated 200 million businesses globally less than 2% value themselves annually largely due to the time and cost constraints. Improving this ratio would help give business owners critical information and insight into the value of their business to refine their decision making and boost their company’s success.
Making the most vital financial knowledge every business owner should know more accessible is part of the broader democratisation of finance that is sweeping economies. New technologies and alternative forms of finance are shaking up markets, with significant implications for both consumers and companies.
Innovations such as different types of peer-to-peer lending and other direct lending platforms that bypass intermediaries are transforming the traditional lending market. Other initiatives, such as cryptocurrencies, social investment networks and the use of big data by financial institutions to refine and personalise their services to customers, are making profound changes to financial markets and in many cases transferring more power to consumers and businesses.
Having an accurate, regularly updated valuation for their companies is empowering for entrepreneurs and business owners. Giving them a clearer idea of the value of their company, helps them establish a more transparent relationship with all their stakeholders, suppliers, lenders and financial institutions.
Certainly helping to boost the performance of UK SMEs could have a significant positive impact on the economy. Research released towards the end of last year by one-middle-tier accounting firm revealed the importance of mid-sized firms in the UK: though they account for less than 1% of all UK firms, mid-market companies generate over £1 trillion in revenue annually, which is nearly a third of all private sector turnover, and they account for one in four private sector jobs, over 6.2 million, across the UK.
Correctly valuing a company in today’s interconnected, technology driven world requires a global, data-driven understanding to answer accurately. BizEquity, for example, utilises over 200 million data points from its patented cloud service and has valued more than 29 million companies world- wide and pre-valued over 1.8 million UK SMEs to help ensure the accuracy of its valuations for the UK market. The valuation is real-time and for a lower cost charged by some accountancy or consulting firms.
Growth companies by their nature have typically more fluid valuations and being armed with the most accurate valuation knowledge puts them in a far better position to succeed. Taking securing finance. Knowing the worth of their business allows owners to ensure they are in a position to structure their financing in the most optimum way and also seek the best terms. It also helps to ensure securing proper credit and risk management – around 100 million businesses globally are thought to operate under-financed and underinsured.
From attracting and rewarding talent, negotiating joint ventures, deciding on R&D budgets or how much to devote to new growth and business development initiatives are all influenced by how much the underlying business is worth.
As well as assisting growth companies with their own strategy and planning, having a better understanding of what a business is worth will also help SMEs get a better service from banks, insurance companies, wealth managers and all the other providers that supply growth companies with necessary services to promote their expansion.
The area where business owners typically show the most interest in ensuring that they have an accurate valuation is on sale – probably the most important financial transaction that they will undertake.
It’s estimated that over 12 million businesses will be sold globally over the next ten years and despite a plethora of specialist corporate finance firms that advise on securing the best value on sale, not all by any means achieve this. With anecdotal research suggesting that in some markets SME are sold for about half their correct value ensuring business owners have access to accurate valuations can be critical for entrepreneurs to secure the appropriate valuations they seek – and deserve.