Looking beyond the number: How valuation tools can be used to drive growth

Of course, the number is important. It represents your past—late night anxiety about a challenging project, the years of consistent effort that drove your success—and your future—the legacy you'll pass on to the next generation. But if you can look beyond the number to the underlying mechanics that drive a valuation, you'll discover tools that can unleash your business’ potential…and maybe enhance the number down the road.

A snapshot of the business

A valuation report will present the reader with data and insights that reflect the state of the business at a moment in time and can be used to aid management/ownership in developing their plans for the future. After all, to get where you want to be, you need to know where you are starting from. It reflects historical performance and extrapolates current operations into the future to arrive at a reasonable valuation conclusion. To do so, the CBV needs to understand the context of the business’ operations. What is the company’s status in the market and how does it compare with industry peers? What multiples are businesses in this industry seeing in recent transactions? What has driven value in similar businesses and how does yours compare? 

Theoretically, owners and/or management could have answers to those questions, but the formalized and rigorous nature of a detailed valuation ensures that their understanding of the business is accurate and up to date. The exercise also acts as an opportunity to test assumptions about where value is generated within the business. Delving into an organization’s workings can help to identify areas for improvement and spur the implementation of best practices that drive value. 

When is the best time to conduct a valuation?

An annual valuation can serve as a barometer for how the company is performing and allows tracking over time. This can provide management/ownership with useful insights on how strategic decisions and their implementation affects value. By having a consistent and regular source of information, leaders have access to better data and decision-making capabilities.

There are also benefits in understanding a company’s valuation in the context of tax planning. Understanding how value is generated can help to ensure the appropriate tax structure is in place to mitigate future taxes for shareholders. Often a valuation is required as part of this tax planning to “freeze” value at a certain date to lock in favorable tax benefits, deferring taxes to future generations. If an appropriate tax plan, and corresponding valuation report, isn't prepared in a timely manner, this can lead to enhanced tax consequences.

For many businesses, the first and only time they think they require a valuation of the company is during a sales process. While that's a necessary step, waiting until this moment, may be too late to take advantage of the insights that a valuation report reveals. If conducted before the sales process even begins—or even better, as a routine part of the financial operation of the business—a third-party valuation may uncover aspects of the business that can be improved or modified to increase the business’ value and its attractiveness to potential buyers when ready to go to market. Waiting too long can lead to unpleasant surprises when ready to sell (i.e., offer price from a potential buyer is below what owners would like to extract from the company upon sale).

Ultimately, each business’ specific situation and needs will determine when is the “best” time to perform a valuation; there’s no universal recommendation that applies to every situation. However, as detailed above, there are clear benefits to making valuations a more frequently used tool in a business’ financial arsenal, with the value of this report coming from the detailed insights that can be gleaned, beyond the number itself. 

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Value drivers

As noted above, a valuation provides important data that can be used to drive future growth…but how exactly does that happen? If you consider all the myriad data available to business leaders, there's a lot of noise; the valuation process and the information that is typically delivered in a report cuts through that noise and concentrates on the value drivers. Below is a summary of the value drivers that are explored as part of a valuation analysis.

Market intelligence

A valuation incorporates an analysis of the industry in which the company operates and future expectations/market growth potential. Management can utilize this insight to make future investing and strategic decisions depending on the status of the industry and any upcoming trends that will influence the company’s operations. 

The business’ place in the market

The SWOT analysis incorporated within a valuation assesses where the company sits within the industry it operates, including its value propositions (strengths and opportunities) and areas for growth (weaknesses and threats). Based on this analysis management can continue to enforce and enhance risk reducing factors, while mitigating and rectifying risk increasing factors.

Operational hygiene 

There are many opportunities to assess how a business operates and identify areas for improvement with the long-term goal of unlocking nascent potential. To begin, evaluating operations against industry best practices can reveal opportunities for improvement and barriers to success. Taking a look at the current employee base and determining whether they are capable of delivering on growth plans is a necessary—if uncomfortable—step towards increasing value within the company. Reviewing client and vendor lists can unveil key vulnerabilities, such as over-reliance on a single customer or vendor, that inhibit growth potential and increase risk. Taking a closer look at operational best practices can set you up for greater success.

Financial hygiene

A core component of any valuation is a comprehensive analysis of the historical financial performance of the company. Conducting a trending and ratio analysis can provide management with insight on the company’s operations and the key aspects that contributed to the company’s financial performance over time. Upon this review, management can uncover and adjust strategic decisions to enhance the company’s future performance capabilities and ultimately, increase its value. 

Forecasting and modeling 

A valuation analysis includes a test of the assumptions that management incorporates into its forecast and/or budget, and the risks associated with achieving the assumed growth rates. This discussion provides management with a lens as to what a typical buyer may ask or assess as they attempt to make a decision whether to make an investment decision. Further, if the report is being conducted for tax planning purposes, the analysis of the forecast by the valuator can prime and prepare management/ownership for future questions that may arise from regulatory bodies such as the CRA. If the valuation determines that the forecast or budget assumptions do not hold up to scrutiny, it's possible to assist management in preparing a financial model that uses current best practices and is underpinned by strong and supportable assumptions.

If you have any questions or are interested in exploring how a valuation analysis and report can unlock your business’ potential, reach out to one of our advisors today.

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