Have you ever wondered what your company is worth? Aside from revenue or overall profitability, a company’s worth can stem from the value of its physical assets, reputation, and future earning potential. Or put more simply, the dollar amount someone would pay to purchase your company can be a way to measure its value. Understanding your company’s true worth can be useful for internal purposes, but more importantly can act as a strategic tool to assist with business transactions and expansion.
When to perform a valuation
Although there are numerous instances in which valuation is necessary (i.e. tax purposes, shareholder disputes, divorce proceedings, etc.), we see our clients needing valuation most during the following periods of transition.
1. Financing: When pursuing equity financing, a valuation is necessary to determine how much of the company an investor should receive for a set amount of capital. For example, a person investing $50,000 would receive 25% equity in a company valued (pre-money) at $150,000, but only a 12.5% stake in a company valued at $350,000. Valuation ensures your investors receive a fair equity exchange for their cash infusion, and protects you from giving away too much company control.
2. Mergers & Acquisitions: In the case of an acquisition, an objective measure of value can be used to reach an agreement between buyer and seller. Of course this valuation is not necessarily the final purchase price, but it provides a benchmark number to begin the negotiations. Similarly, a valuation in a merger scenario can assist with the structuring of the deal’s terms.
3. Buy-Sell Agreements: This type of agreement governs the situation when a business co-owner chooses to leave his/her company for any reason. A corporate valuation is used to determine a per-share price that outlines the terms of a buyout scenario.
The common thread that binds these three scenarios centers around leverage—a valuation can increase bargaining power in a negotiation setting. For both large and small companies, a valuation adds legitimacy to a negotiation by presenting an objective and concrete set of financial numbers that can serve as a starting point for conversation around equity percentages and future investment. It can be particularly strategic for small businesses to spend money on a valuation and a formal financial assessment in order to craft a more appetizing deal; a smaller player nee increase its power when dealing with larger parties.
At EMH Strategy, we have the ability to provide you with either a detailed, formal analysis or a less expensive and time-consuming estimate. Many of our clients value these estimates for the reasons outlined above, as well as ‘just so they know.’ We hope this brief look into business appraisal is valuable, and please contact us if you have further questions on the subject.