3 reasons why every company needs a business valuation

Valuation is the ultimate metric for businesses. It’s the objective value of a business as seen through the eyes of others. Establishing a business valuation is a requirement for any organization going through a sale, but leaders often think about valuation as a process to embark on only when they are in the middle of a sale. Here’s the reality: Limiting valuation to an impending sale can present a major setback.

There are many reasons to advise against relying upon this reactive approach. In the Vistage CEO Confidence Index, 22% of small to midsize business (SMB) owners and CEOs said they plan to sell their business within the next 5 years.

But a whopping 51% are approached weekly or monthly about selling their business — meaning a leader may receive a deal they decide is too good to refuse at any moment. And with 2030 looming in the background — forecasted to be the start of a massive global economic downturn — leaders are beginning to contemplate their next move accordingly.

While it may feel easy to deprioritize a business valuation when a sale is not imminent, it is increasingly important for leaders to have a tried-and-tested qualification for their business at their fingertips, rather than a back-of-the-napkin emotional belief regarding their company’s value.

A business valuation is a worthwhile endeavor for nearly every organization. The long-term impacts make it well worth including in an organization’s annual process. While there are many benefits, the following are three of the biggest advantages associated with regular business valuations, beyond preparing for a sale.

1. Better investment decisions

Vistage’s Q1 2024 Vistage CEO Confidence index found that 36% of SMB CEOs and owners are planning to increase their investments in the year ahead. Knowing which levers to pull and which investments will have the greatest direct impact on the value of the business is a critical element in making smarter investment decisions.

2. Raising capital with expectations of future interest rate cuts

Being able to present how capital will impact business valuation will help with raising funds and working with new partners as organizations prepare for the growth cycle. Having an objective business valuation and being able to connect requests for capital with how the investment will impact valuation provides a strong argument to secure that capital.

3. Remember, a business valuation serves to generate confidence in strategic planning

A business valuation sets a clear and objective benchmark for improvement within a strategic planning process. This irrefutable KPI allows leaders to gauge whether they are actively building value within their business year-over-year.

It also creates a fair market value that could help to defend any legal or IRS-related issues. Having an objective, credible third-party valuation makes it easier to calculate and plan for taxes, insurance claims and settling disputes involving real estate or property.

Furthermore, for exit and estate planning a standardized expectation plays an important role in ensuring the CEO or business owner is planning accordingly. Many CEOs and business owners use the value of their business as part of their retirement plan, making it critical for leaders to gauge the amount they will receive when they sell their shares, exit or both.

A business valuation has too long been passed over until an active sale process. But those who have an up-to-date, accurate measurement of their company’s value stand to gain an edge on their competitors — and to best set themselves, and their organization, up for continued success and longevity.

This story first appeared in Inc.

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