How to use company valuation in decision making – article sourced from Equidam
It’s not uncommon for business owners to be aware of the valuation of their company. What is surprising is that many don’t realise the different ways a company valuation can be used in your every-day business decision-making process.
When do you need a valuation?
There are certain occasions that call for calculating the valuation of a company. Some of these occasions are, for example, looking for investment, issuing stock, forming employee ownership stock plans, etc.
The examples we mentioned before, cover some of the trigger events when you are required to determine your valuation. Genuinely, valuations are useful in the beginning phase of a company. Founders can find out a lot about their own company, customers and market by having a general understanding of their company value. On the other side of the spectrum, business owners who are planning an exit strategy or a succession plan can also benefit from knowing the exact value of their company.
However, did you know that valuation can be used as a factor in your strategic business decision-making?
Valuation in decision-making
Generally, business owners who are aware of their valuation are in a much better place to make decisions regarding their business, simply because they have an understanding of the true situation of their company.
Business owners can use valuations for estate planning, determining life insurance needs, setting a buy/sell agreement, setting up incentive plans for the management team.
To us, somewhat more important than the rest is looking for a way to increase your value. Only after you understand what the business is worth you can start setting goals for where you want your value to be in the future.
Some key ares to focus on to grow your value are:
Increase cash flow – investors are interested in future cash flows. Increasing the cash flows will increase the valuation. You can do that by increasing revenues or improve gross margins.
Decrease business risk – Business risks are issues such as reliance on the owner or management, customer concentration and others. The bigger the risk, the higher the rate of return required by an investor.
Business Growth – generally, the higher the growth rate, the higher the value of a business.
To recap, the first step to growing your business worth is understanding what valuation means and when it is used. Valuations are often needed for specific trigger events- such as a funding round for example, but knowing your business value enables you to make much more informed and fact-based decisions for your company future and build a strategy to ensure business success.