What Is Your Business Worth? 5 Reasons to Get Your Business Valued Every Year
This is a question with a simple answer, right... But 98% of small business owners didn't know the value of their companies.
At its basics, a business valuation is the process of determining the economic value of a company.
It's a critical step for understanding how your business fits into the market and where opportunities or risks may lie. Valuations aren’t just for when you’re planning to sell. They serve as a roadmap for decision-making, helping you align your strategy with your goals.
Why Are Business Valuations Important?
Informed Decision-Making: A valuation provides an objective financial perspective for your business and net worth.
Performance Tracking: Valuations let you monitor your growth year over year. By identifying what’s driving (or detracting from) your value.
Risk Management: A valuation highlights areas where your business might be vulnerable, from high customer concentration to cash flow instability. Addressing these risks protects your long-term success.
Exit Strategies: A valuation ensures you're prepared with accurate numbers and accurate growth values. It also helps determine what might be the best exit strategy for you.
Related: Mastering Business and Wealth: A Guide for Business Owners
EBITDA: The Core Metric in Valuations | What is EBITDA?
You likely hear this term at least once, if not on a regular basis, when running a business. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a key metric in business valuations because it focuses on the financial performance of your core operations. EBITDA strips away variables like debt, taxes, and accounting strategies that can obscure your business’s true earning potential.
Why Does EBITDA Matter?
Simplifies Comparisons: Every company has unique tax structures and financing methods. EBITDA removes these variables, making it easier to compare your business with others in the industry.
Shows Operational Efficiency: By excluding external factors, EBITDA offers a clearer view of how well your business performs day to day.
A Cash Flow Proxy: EBITDA is often used as a stand-in for cash flow, making it a favorite among investors and buyers.
For many buyers, EBITDA serves as the foundation for determining purchase prices. It’s often multiplied by an industry-specific factor to calculate valuation, making it crucial for businesses aiming to attract buyers or investors. Each industry has a different range of multiples that is used to place a valuation on the company.
5 Reasons to Get Your Business Valued Every Year
1. Track Growth and Performance
As outlined above, a yearly valuation provides a clear picture of how your business is performing over time. By comparing year-over-year data, you can identify:
Areas driving growth.
Underperforming segments that need improvement.
Progress toward long-term financial goals.
Think of it as a financial health check for your business. Without this data, it’s harder to pinpoint what’s working and what isn’t. It's also good to complete annually to ensure your financial plan and net worth is up to date.
Most small business owners have 70-80% of their net worth tied up inside of the equity ownership of their business.
2. Make Smarter Strategic Decisions
Whether you're considering expanding, taking on debt, or launching new products, knowing your business's value equips you to act with confidence. A valuation ensures that:
You have an accurate starting point for big decisions.
You can identify opportunities for reinvestment in high-growth areas.
You avoid overextending yourself financially.
Having up-to-date valuations can also strengthen your position when negotiating with lenders, investors, or potential partners.
3. Prepare for the Unexpected
Unexpected events—such as changes in market conditions, industry disruptions, or economic downturns—can significantly impact your business's value. A valuation helps you:
Understand the risks your business faces.
Build a proactive plan to mitigate potential losses.
Stay agile and adapt to changes more effectively.
Even in stable times, being prepared means you won’t be caught off guard if an unexpected opportunity or challenge arises.
4. Strengthen Exit Planning
If you plan to sell, transfer, or merge your business, knowing its value well in advance is crucial. Annual valuations allow you to:
Identify and address value gaps early.
Set a realistic timeline to maximize your business’s worth.
Have a strong negotiating position when the time comes to sell.
Buyers are drawn to businesses with a clear track record of performance. Consistent valuations show that you’re serious about your business’s success and have been intentional about preparing for its future.
At the end of the day, it makes planning for an exit much easier.
Exit planning is just good business planning.
5. Understand What Drives Your Business’s Value
A valuation isn’t just a number; it’s a tool that reveals what makes your business valuable. Regular valuations help you identify key drivers, such as:
Revenue Growth: A strong, consistent increase in revenue signals a healthy, scalable business.
Customer Retention: High retention rates indicate stability and long-term potential.
Market Position: Your share of the market and competitive edge play a significant role in your overall worth.
Operational Efficiency: Businesses with streamlined operations and lower costs are more attractive to buyers and investors.
Understanding these factors allows you to focus your efforts on what truly enhances your business’s value and prepares you for future opportunities or challenges.
How Do Business Owners Get Valuations?
Many platforms offer automated tools for estimating your business value based on financial inputs like revenue, profits, and industry benchmarks. This is often a quick and cost-effective way to get a rough estimate, but not as precise as a professional valuation.
Complete your free business valuation today: BizEquity
When Should Business Owners Get Valuations?
Many business owners wait until they’re selling to get a valuation, but this approach can leave value on the table. Here’s why and when you should prioritize valuations:
Annually: Just like financial statements, valuations should be part of your yearly review. This helps you track growth and identify weaknesses before they become problems.
Before Major Decisions: Whether you’re planning a merger, acquisition, or large capital investment, having an accurate valuation ensures informed decision-making.
Exit Planning: Valuations aren’t just for selling. They’re a tool for identifying and addressing value gaps years in advance, giving you time to increase your business’s worth.
Put Your Valuation to Work
Once you have a valuation, use it strategically:
Refine Your Business Strategy: Focus on areas driving growth and profitability.
Engage Your Advisors: Work with financial, tax, and legal professionals to align your valuation with your broader goals.
Plan for Tax Implications: Leverage your valuation to optimize tax strategies, especially if you’re considering an eventual sale.
Final Thoughts
Your business’s value isn’t just a number; it’s a reflection of the hard work and strategy you’ve invested. By valuing your business every year, you stay informed, prepared, and in control. It’s a small commitment that can pay off in major ways—helping you track progress, seize opportunities, and protect your future.
Make annual valuations part of your routine, and you’ll be better equipped to answer the question: What is your business worth?
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About the author: Finn Price, CPFA, CEPA, is a business owner and wealth manager at Railroad Investment Group. He helps successful entrepreneurs & individuals with concentrated stock positions in their 30s, 40s and 50s build, organize, protect and transfer their wealth.
Note: this article is general guidance and education, not advice. Consult your money person or your attorney for financial, tax, and legal advice specific to your situation.
Securities and advisory services offered through LPL Financial, a registered investment Advisor, Member FINRA/SIPC.
