Understanding Business Valuation: Why do we need it?

When we were developing EquityMaven back in 2018-19, we thought it was an interesting time in the world’s economy. Why? Well, the wealthiest generation in American history needed to pass down its riches (around $68 trillion to be precise*) – which is rather a lot of money to move around. Many Baby Boomers (those born between 1946 and 1964) were reaching either the end of their working careers – or the end of their lives. 

 

That was before the world was struck by the COVID-19 Pandemic. If 2019 was interesting for simple demographic reasons, 2020 has been unprecedented in the uncertainty, volatility, disruption (and, in some cases, ruin) it has brought to the world – not just in small business, but also in large corporations, and even outside the commercial sphere, in public health, geopolitics, and even day-to-day life. Nothing is as it was.

 

Yet, the demographic “tidal wave” of small business successions is still building. Many Baby Boomers, already looking to retire and exit their small businesses, are even more eager to “cash out” after the stress of COVID-19. For this reason, an estimated 70 million people in the US alone** are needing to sell their businesses and bequeath their assets to their Gen X and Millennial heirs.



Many of these Gen X and Millennial professionals have also lost trust in working for large corporations, or are re-evaluating career ambitions and life goals in light of COVID-19 impacts, and so are looking to buy businesses that they can run themselves, either with capital they have saved up, or via a “search fund” – a rapidly growing investment vehicle that enables young professionals to enter entrepreneurship via acquisition***. 

 

With these changes underway, we’re now entering an era where being able to accurately value a business is crucial. This explains why IBISWorld estimates that by 2020****, revenue for the Business Valuation Firms industry will have increased over five years at an annualized rate of 1.1% to $6.4 billion, almost doubling the growth rate from the previous five years.

 

Here are the some of the primary scenarios where people would need a business valuation product like EquityMaven:

 

1. Buying, selling or merging a business

 

As we’ve mentioned, Boomers selling their businesses need an accurate valuation so that they can put a fair price on all the years of work they’ve put in to build those businesses. And aspiring Gen X or Millennial professionals (or anyone else) buying a business, need to ensure that they’re not overpaying. 

 

2. Raising funds

 

Entrepreneurs always need to raise capital, whether it’s through equity, bank finance or crowdfunding – but how do they go about valuing their businesses in order to do this? To negotiate from a strong position and raise funds on advantageous terms, entrepreneurs need a reliable valuation. As do the investors or lenders evaluating the same deal from the other side.

 

3. Financial planning

 

One of the biggies when it comes to family-owned businesses is knowing the true value of the business, so that estates are bequeathed fairly, and business owners can plan their estates properly. A realistic value of a business’s value can also help during big life events such as divorce or retirement. 

 

4. Ongoing strategic knowledge

 

Valuation is not just about buying or selling though. Measuring the value of a business over time using consistent KPIs and industry benchmarks can help owners see where they may be lagging (or outperforming) industry peers, identify areas for improvement, make better strategic decisions, and ultimately increase the value of their business over time. 

 

5. For financial advisors, insurers or bankers 

 

Those who provide financial advice can use a tool like EquityMaven to produce a company valuation report, so that together with their clients they can make more informed decisions on portfolio allocations. Insurers can use the tool to determine whether a business has the right level of insurance, whereas bankers can use EquityMaven valuations to determine the health of their loan portfolios.

 

The great “wealth transfer” is not only happening in the USA. It’s happening in many other markets too, spurred on by 10 years of bullish markets. From London to Hong Kong to New York, business valuation is vital across the world – allowing financial transactions to move forward so that they can benefit individuals, businesses and economies as a whole.

 

Sources:

 

*https://www.cnbc.com/2018/11/20/great-wealth-transfer-is-passing-from-baby-boomers-to-gen-x-millennials.html

 

**https://cabb.org/news/baby-boomers-incredible-numbers-are-buying-and-selling-businesses-part-1-2

 

***https://www.gsb.stanford.edu/faculty-research/centers-initiatives/ces/research/search-funds


**** IBISWorld Industry Report OD4797 Business Valuation Firms in the US