Completing an annual valuation on your business is the financial service industry equivalent of undergoing your annual physical. I’ll turn 55 this year and I have resigned myself to the fact that prescription medications have officially become their own food group and an annual physical is no longer optional. My annual pilgrimage happens to take place in the spring tucked neatly amongst the sporadic appointments to see specialists for knees, elbows, near sightedness, far sightedness, rotator cuffs and something about my lumbar.
Now, the key word here is annual. If I had my cholesterol checked 10 years ago and then never again how am I going to know if what I am doing is working? An annual examination provides a historical record of your overall health including your vital signs enabling you to make changes in order to perform at your best. The good news is that, unlike my annual physical, your valuation results should get better as your business matures.
Your business is a living, breathing entity. Just like the investments you make on behalf of your clients, it needs to be nurtured, protected, and developed in order to realize its maximum value. It’s important that your valuation be updated annually. The monetary value of your practice is just one of many pieces of information to be gleaned from a professional business valuation.
While establishing and monitoring a market-based value of their business is the primary reason most advisors complete a valuation, the assessment also provides additional information that is essential to building equity and making the decisions that shape the future of your business. Information like transition risk, cash flow quality and market demand. It breaks down the value of your business on the open market considering various deals structures. It benchmarks you against industry averages in areas such as revenue concentration, average client affluence and average revenue per client.
Building equity is about more than just adding new clients, it requires planning, clear goals and right the information to succeed. Conducting an annual valuation will provide information that will become the bedrock from which your equity can be built.
Now that we have shed some light on the wisdom of doing a valuation on an annual basis, lets discuss just a few of other ways to leverage the information contained in the report.
Updating Your Continuity Plan
It would be extremely difficult to create an effective continuity plan without knowing the value of your business. Without a current valuation, your business is in jeopardy of being undervalued much to the detriment of yourself or your estate in the case of a triggering event. Using a current valuation to establish the price and terms by which your practice will be sold in a death or disability scenario ensures your continuity plan will effectively protect the value of your practice. Additionally, establishing your continuity partnership with current values in hand is important. Potential continuity partners want to understand the possible impact to their existing business should they be called to fulfill their part of the agreement.
Developing a Long-Term Exit Strategy
Annual valuations are an indispensable tool in the development of a long-term exit strategy. Regardless of if you would like to gradually transfer ownership through internal succession to the next generation or you choose to sell your practice outright, a historical timeline of your value will assist you in choosing the best option for you. Assessing your business and identifying the value you would like to realize when you step away is crucial for determining what will need to be done to get there in the time available. The ability to track the value and growth of your company year over year will allow you to evaluate value drivers, set milestones, and make necessary adjustments to the plan as you move forward. Documenting years of solid, steady growth is not only a valuable business development tool for building your practice over the years, it is important information for any potential buyer.
Preparing for Acquisition
Knowing the value, along with the strengths and weaknesses of your own business, empowers you to find synergies between you and a seller to ensure a good fit. An accurate picture of your own business can help convey to a seller that you are a quality candidate with the infrastructure and financial means to absorb their practice and provide their clients exceptional service. Having a current valuation at the ready also makes you more nimble and agile as a buyer in this extremely competitive marketplace. In the last few years, we have watched bank financing become an increasingly popular funding mechanism when it comes to acquisition. Demonstrating strong value over time can make this process easier. Even if you don’t intend to use bank financing, pre-qualification can lend credibility to your ability to purchase the business for sale.
Determining Your Growth Focus
Augmenting your valuation with additional benchmarking analysis provides a deeper look at the inner workings off your practice and how they stack up against the competition. This information can be used to identify and address those areas of your business that are underperforming. That, in turn, can become the agent for change that can ultimately increase in the value of your business. Performing these assessments annually affords you the capability not only to create a roadmap for the success of your business, but also the ability to see if that roadmap is taking you in the right direction and to make course corrections if necessary.
Business value is only relevant if it has the proper context, methodology, and expertise standing behind it. Simply applying a multiple of revenue is not an accurate reflection of value. You must understand why you’re assessing value and pair that with an evaluation that not only pulls from a data set of like businesses but also accounts for a wide range of business factors. This unique view of your practice, analyzed by accredited valuation professionals, will produce the most accurate value of your business.
FP Transitions valuation reports are backed by an extensive database of over 12,000 valuations and a team of valuation professionals. Our market-based assessment is a core benefit of our Equity Management System® annual membership program, along with yearly continuity plan reviews and benchmarking reports (included with Grow level members and at a discount for Basic level membership).