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Why Private Firms Should do Annual Business Valuations

April 7, 2014

Business owners spend considerable time and other resources maintaining their financial statements, legal matters, budgeting and other vital business support systems. However, business valuations are often seen as a one-time as needed exercise. This should not be the case. An annual business valuation exercise can render many benefits to the owner of a private business which we will touch on as follows:

  1. Estate Planning Enhancement – Many businesses owners carryout on-going estate planning whereby shares are transferred to their children on a regular basis. Up to date business valuations can ensure this is completed at acceptable values to the owners and the tax authorities.
  2. Measurement of Performance – An annual valuation by an independent financial advisor can be a method for multi-shareholder companies to assess management’s ongoing performance in terms of value enhancement. The work that goes into the valuation exercise can serve as a strong input into an annual performance review giving the shareholders a clear feedback loop.
  3. Access to Capital – An obvious advantage of an ongoing valuation update is the ability to use that document and the due diligence work surrounding it as a key input into the capital raising process for both debt and equity. Not only should the valuation work derive a useful number to set a valuation for structuring purposes of the financing, but the financial advisor can act as an advocate in certain cases to support his work to the sources of potential capital.

These are other benefits that an annual valuation engagement can provide to a company including communication enhancement as a tool to manage potential shareholder disputes. Taken together, these benefits should far outweigh the cost of the exercise for the company.