Shocking: Just Revealed – Your Business Valuation Secrets

Understanding Business Valuation

Defining Business Valuation: Going beyond book value

Your accounting statements present a stripped-down value of your business—the book value if you sold every asset, paid off your debts and cashed out. However, this is rarely the full picture, and there are other determinants of a company’s value to a potential buyer that aren’t found on the balance sheet. “For example, imagine a large competitor is eager to expand in your geographic area,” says Nuri Benturk, senior vice president of Investment Banking Solutions at RBC Wealth Management–U.S. “They could be willing to pay a premium that’s not being captured in your book value.”

A valuation considers both tangible and intangible aspects of a business, such as assets, liabilities, profitability, market position and future growth potential, to determine its overall worth.

The importance of objective assessment: Why a third-party valuation matters

Most valuations are conducted by a third party, such as a wealth management firm, business broker, accountant or appraiser, to provide the owner with an objective assessment of their company’s performance and an estimate of what a buyer might pay under current market and economic conditions. “Sometimes owners lose sight of what their business is actually worth, so a valuation can be an important reality check,” Benturk says.

Methods of valuation: Market-based, income-based, and asset-based approaches

When a professional values your business, they come up with a number using different market-based, income-based and asset-based approaches. The appraiser will choose the best method for your specific situation, considering factors such as the purpose of the valuation, your company size, location and industry.

The Benefits of Business Valuation

Informed decision-making: Knowing your company’s worth in different scenarios

Knowledge is power, and knowing how much your business is worth allows you to make informed decisions in a number of situations, including:

• Preparing to sell
• Making future investments
• Planning for the future: Using valuation to optimize business transition
• Making informed investments: Understanding the return on investment

Planning for the future: Using valuation to optimize business transition

Nearly 30 percent of RBC Wealth Management’s surveyed business owner clients currently have plans to sell or transition their businesses—70 percent of those in the next five years, according to the survey. When thinking about their exit, valuation was a top concern of the surveyed owners. That’s because it’s a crucial step that helps create a more effective business transition plan. Not only does a valuation give you an idea of what to expect from a sale, but it also helps you identify opportunities to optimize your business that could have a significant impact on the sale price—for example, by reducing costs and improving your margins over the upcoming years. It’s important to have your valuation completed early—before you begin looking for buyers or discuss transitioning the business with family or business partners. That way you’ll have time to implement changes that may affect your business value, and you’ll be in a better position to negotiate if someone unexpectedly comes with an offer.

Making informed investments: Understanding the return on investment

If you’re thinking about investing even more to grow your business, a valuation can show the return on the money you’ve already spent. “Before contributing another large round of savings or financing, wouldn’t it be nice to know how things worked out in the past?” Benturk ask

Common Misconceptions and Challenges

Debunking myths: Valuation is not too expensive, time consuming, or complex

A common refrain among business owners is that the valuation process is too expensive, time consuming and complex. But getting a valuation could be easier than you think.

Overcoming common obstacles: Addressing the 41% who have never completed a valuation

A 2024 survey of RBC Wealth Management’s business owner clients found that 41 percent have never completed any type of valuation analysis.

The role of professionals: How wealth management firms, business brokers, accountants, and appraisers can help

You don’t have to go through this process alone. Wealth management firms, business brokers, accountants, and appraisers all have the expertise to help you understand your business’s worth and navigate the valuation process.

Practical Applications of Business Valuation

Succession planning: Using valuation to build a successful transition plan

Knowing the value of your business is crucial for effective succession planning. It allows you to create a clear plan for transferring ownership to the next generation, whether that’s your children, other family members, or key employees.

Growth strategies: Identifying opportunities to increase business value

A valuation can highlight areas where your business can improve and grow. By focusing on increasing profitability, expanding into new markets, or developing innovative products or services, you can increase the overall value of your company.

ESOPs and employee ownership: Understanding the role of valuation in ownership transfer

If you’re considering an employee stock ownership plan (ESOP), valuation is essential. An ESOP allows employees to own shares of the company, and a proper valuation is needed to determine the fair market value of the shares.