For What It’s Worth: The Importance of Business Evaluations

Before your banker, a potential investor, or a purchaser decides whether they will be interested in your business, they will want to know whether your business has the potential to be a long-term winner. Bankers will be foremost interested in your solvency. This seems to be a big issue in the jobber community in Canada at this time.

Investors are primarily focusing on whether your business can offer defined, long-term profits.

Potential acquirers of your business will certainly want to know whether your business is worth buying or financing, to ensure that your business will earn them a healthy return. For all of these people, the key information relates to your financial and operating stability, and part of that entails knowing how valuable your business is.

Risk analysis is fundamental when your business plan is contemplating outside investors or bank funds. Part of this analysis is including a viable exit strategy for both you and them. This procedure will give you the opportunity to disclose possible risks, and give you a double advantage: it will reveal you as a realistic businessperson who can think ahead, someone who can consider damage control; and in the case of an unexpected disaster, it will show that you have thought of the legal implications.

Furthermore, how can you seek investment or a buyout if you don’t know how much your business is worth? Almost everything that is offered for sale in the marketplace has a value placed on it, from which a profitable selling price can be determined.

The business evaluation analysis cannot be limited only to content. While evaluation criteria may differ from case to case, the main aspects under review remain the same:

• The written business plan itself — dates and deadlines must be analyzed exhaustively. All fundamental questions must be answered.

• The manner of presentation — form, clarity, conciseness, logical presentation, a realistic approach.

• The viability of the business — from the point of view of market competitiveness, management capability, and financial competence. Does your business plan present an opportunity that has a business strategy with a strong and sustainable competitive advantage?

However, disaster is a more ominous category.

Dissolution, death, and divorce are the three “Ds” of business disaster. Thus, the value of your business becomes a critical issue and demands an immediate resolution.

Fundamentally, the inherent quality that makes your business useful and desirable forms the basis of business evaluations. Economic valuation is a survey of the monetary benefits that accumulate to your business and thus, business appraisal measures the economic benefit that accrues to you as the owner, that includes the price those benefits could command in the marketplace.

When a professional appraiser conducts a business evaluation, he or she usually surveys the economic market conditions of your industry as well as the special features of your business such as unique or unusual products and services you present to the marketplace.

Physical assets, such as furniture, fixtures, libraries or databases, and computer equipment are grouped into what is termed the “benchmark” value of your business, because outsiders with money to lend, invest, or buy with consider the value of your business to be at least equal to the value of your firm’s total fixed assets. Book value, an accounting term, doesn’t describe any kind of worth or value in financial terms but represents the original cost of the asset minus any taxable depreciation applied against the item.

Book value is normally lower than the replacement cost of the asset, so it is important that all fixed assets be valued at “market” rather than “book” value.

Potential lenders, investors, and buyers concerned with the profit level of the business should understand your definition of profit. If your business is operated as a sole proprietorship or partnership, then pre-tax profits are significant. In contrast, post-tax earnings are the measurement if your business operates as a corporation.

An examination of your business’s income statements (also known as a profit and loss statement) provides vital information about the earning history of your firm. Trends in revenues, expenses, and profits are determined from these business records.

You should consider business evaluations like an annual medical check-up. Above all else, they can provide refreshing business information and warn you of pending problems.