Making the necessary preparations to have your company valued by an independent source like Synergetic Finance is important in having your valuation engagement go smoothly. The process of preparing for a business valuation can also help improve the value of your company. Often potential clients want to have a valuation performed quickly, yesterday if at all possible. These requests are often difficult to accept, as expediting the process can cause problems. Completing a valuation without looking at critical business issues creates negligence while doing an independent valuation.
However, the valuation of a particular company may be expedited under certain circumstances if all systems are in order from the start. Nonetheless, it is a wise practice to institute systems and procedures that make it easy to illustrate a company’s value. Here are some key steps a business owner can take to make this a positive experience for all parties while at the same time improving the way the business runs.
Time frame: The first step valuators go through is determining if an engagement is doable in the time period requested. Each engagement is different, and valuators have to be able to get a sense of the dynamics involved before taking on the work. They need to collect certain details from potential clients to understand this. Signing a non-disclosure agreement is not critical at this point, however, valuators need to know why the business valuation is being performed, how many shares are being performed, the size of operations and other critical business factors. Having this information readily available in the pre-engagement stage is helpful for all parties. It helps the valuators start the work in a mutually beneficial way while also maintaining the required independence needed in valuation services.
Data collection: Once a valuation engagement is accepted, valuators begin a data collection process. This can be simple or complicated depending on the transparency of operations and the consistency of the company’s accounting books. If receipts are kept in shoeboxes and information is not easily accessible, it can be difficult to determine value, increasing the time required. Since non-audited financials are not easy to verify, we need to agree on the correct set of reports to use for the valuation. Valuators often get three or more different kinds of financials: a QuickBooks™ file or related software program, tax returns and detailed non-audited financials. While it is helpful to know how each set of books reconciles, it is better to confidently produce a single set of books. Cleaning up reporting procedures is particularly valuable to potential buyers, as the post-acquisition integration will go more smoothly.
Exit planning: At Synergetic Finance, we believe the best way to exit your business is to plan for the exit before the business starts (i.e., begin with the end in mind). Managing a privately-held company consistently with solid financial systems will help considerably when the time to sell comes. An operating procedure manual, along with functions that can be duplicated and systemized, while also producing audited financials will make a company more attractive to a buyer or anyone who invests in your company. Having your company think and act like a public company may be time consuming, but it is less time intensive in the long run, as it saves time in implementing growth plans, raising capital, doing valuations and managing effectively. Setting up the right system now can save years down the line and well worth the extra effort.
Valuation process: Once the data is validated, the process of valuation really begins. From this point, valuators are able to review everything, and having avoided potential red flags, they can move quickly to making solid conclusions regarding the business, the industry, competitive advantage and growth plans. All of these components go into the final conclusion of value. When valuators do a site visit, they will be well informed so they can ask the right questions.
Once these key questions are answered, the process of writing the valuation report begins. A thorough valuation often contains 100 pages of details to support the valuators’ professional judgment, including the unique facts of each case. When hired as an advisory for buy-and-sell agreements, the valuator’s judgment will be less impartial by design, but getting this value correct is an important part of the negotiation process.
The “garbage in/garbage out” principle applies to valuation as in other professional endeavors. To do a good job, it is important to understand operations, have solid financials and make conclusions regarding the story a business is telling. To present your company in the best possible light, it helps to start with the right foot forward, a solid set of books and transparency regarding the way the business runs. All of this will help produce a higher value over time for a company.
For more help to prepare for or request a business valuation, contact Synergetic Finance. We’d be happy to guide you!
To your success,
Mark Girouard, MBA