What is the enterprise value of my business?
Many entrepreneurs ignorant of the importance of the value of the enterprise. Being aware of it is important while undertaking strategic decisions like sale or investment transaction.
We met with a new client who is into the business of HR services with over Rs 100 crore turnover. The performance has been consistent and not affected by the Covid pandemic. Moreover, the company has reasonably well-established governance and internal control practice.
He is looking for an exit strategy through sale. The reason for the sale of the business is apparent. He wants to exit as he is growing old and children have no inclination to carry forward the legacy—a commonly sighted situation in the MSME segment in India in recent years.
We observed that the process to sell the company is very inappropriate. There is no preparation of any documents, no organised thought process, or professional advice on the sale. They tried to seek potential buyers through their friends and relatives. They got a potential buyer through their network and almost agreed on a price. We felt that it was much below its worth.
MSMEs generally do not give enough attention to improving the enterprise valuation before any action like sale, investment etc., instead, they accept whatever the value arrived during the transaction process.
Having devoted one’s entire life to developing the enterprise, assessing how valuable one’s business is should be paramount. Secondly, the valuation of the enterprise need not be linked to the immediate sale. There are many reasons for undertaking valuation.
Reasons to Value Your Business
· To sell your business
· To attract investors
· Buying out the other owners
· Offering employees equity
· To better understand business’s growth
The list can go on as small business owners’ personal and professional lives revolve around their business and potential. While many of the reasons above involve changes in the company or its ownership, personal events such as marital discord, illness of a critical person, the sudden demise of the enterprise, age factor etc., may also influence the valuation.
How to Prepare for a Business Valuation
If you’re conducting a business valuation for informal purposes, you may want to do it independently. However, hiring a professional valuer like a certified valuer registered with the Insolvency and Bankruptcy Board of India(IBBI), Merchant bankers, Chartered Accountants, or Financial Advisors could be a good idea if you need the analysis for more serious matters.
In either case, there are a few steps you can take to prepare for the valuation:
Get Your Financial Documents in Order
Every valuation is going to be based, at least in part, on your business’s finances. Even the market-based valuation method requires your business’s financial information to find suitable comparable to justify the value you will seek.
At a minimum, you’ll want the previous three years financial statements, including the balance sheet, income statement, and cash flow statement. Then, combine these statements to ensure everything is up to date.
Other finance-related documents, such as sales reports and industry forecasts, can also be important, particularly for DCF and market-based valuations.
Organise Other Essential Documents
Depending on your reason for the business evaluation, you may also want copies of your business licenses, permits, deeds, and certifications available, along with any ongoing contracts with insurers, creditors, vendors, and clients.
If you’re looking for business loans, you’ll likely need to share these along with your financials. You can also pull out your bureau report (Ex CIBIL) and present it to show your credentials.
List Additional Intangible Assets
It would help list the business’s tangible assets (such as cash, property, and equipment) on your balance sheet. Some intangible assets may be listed there, such as copyrights or patents. But think about other intangible assets that may be providing value.
An extensive email list, customers loyalty scheme, good rankings in search engine results, engaged social media profiles, and positive online reviews can all help you attract and retain customers. These types of assets could help improve your business’s valuation even if they don’t have a value on its balance sheet.
Identify sustainable competitive advantages.
If sustained for years and decades, every business must have something playing a crucial role in its success. So be aware of such strengths that support your business to be there.
There are also ways to demonstrate the business’s value to potential buyers that don’t rely on the numbers. For example, if you can show how processes and systems are in place that will keep the business running after you leave, buyers may be more willing to agree to a higher valuation.
Or, perhaps you can highlight how your employees are happy and take ownership of their work. Low turnover can save the business money, and responsible employees can make transitioning to new management easier.
Improving Your Business Valuation
Your business’s valuation will depend on how much money it makes, and increasing revenue and cutting costs are the core essentials to improving your valuation. This apart enterprise value is influenced by aspects such as the business prospectus, internal control, governance, business process, HR practice, etc.
The enterprise valuation can be improved by working on various elements listed above. However, it will happen over a while, not instantly.
You may hire a professional to advise you on improving the valuation. Hiring a professional valuer might be an excellent step, as they can give you the current valuation and help you identify your business’s strengths and weaknesses. They may even be able to offer suggestions for improvement based on what they’ve seen work for other companies.
Do a Practice of Regularly Valuing Your Business
Learning how to estimate the value of a company can be important for MSMEs for many reasons. Even if you’re not planning on selling your business or seeking investment, regularly performing a quick business valuation can help you track your progress over time. In addition, taking a deeper dive into the valuation may help you uncover growth opportunities.
Regular exercise of undertaking valuation is a healthy practice. It is a strategic initiative and can benefit the company in many ways. Giving attention to factors that contribute to higher valuation will put the firms on a pedestal and help the firms secure investment at shorter notice if the need arises.