The Importance of Conducting an Annual Business Evaluation

Do you know what your business is worth? Landscaping, retail, e-commerce…  It doesn’t matter the industry they’re in, many business owners will give you a blank stare if you ask them this question. Others will give you a ballpark figure pulled from thin air, which may be undervaluing or overvaluing their business.

This explains why many owners end up unpleasantly surprised when they think about selling their business, only to get a valuation that is much lower than they have in mind.

Savvy business owners avoid that scenario by commissioning a business evaluation every twelve months. Most importantly, they understand that a business valuation isn’t just something you do when you plan to sell your business.

There are other reasons for an annual business appraisal. We’ll cover the details in this post.

What Is an Annual Business Evaluation?

An annual business valuation comprises a yearly appraisal of the value of a business. Professional appraisers look at asset values, liabilities, cash flows, industry data, and more to come up with a factual value for the business.

The numbers do more than state how much a business is worth.

Benefits of Annual Business Evaluation

Some of the other benefits of yearly business analysis include the following:

Provides Accurate Financial Data for More Informed Decision Making

As a business owner, you may feel tempted to estimate expenses, revenue, and profitability using historical figures. However, this approach comes with risks. Those numbers are ambiguous, and they don’t provide any real insights into the state of the business.

Professional business valuations, on the other hand, provide accurate numbers that clearly depict your company’s financial health. When it comes to making key decisions, you’re better off relying on factual numbers instead of blind estimates.

Thus, a professional annual business valuation can provide you with the foolproof information you need to make significant business decisions.

Prepares Owners for a Potential Sale

Many industry experts will agree that the best time to start planning the sale of your business is when you least need to sell. The first step in preparation for the sale begins with working out how much your business is worth in the first place.

This gives you the best chance to avoid overvaluing or undervaluing your business. Knowing your company’s worth can give you more leverage in all the potential dealings you’ll complete between now and when you finalize the sale.

Provides More Assurance for Stakeholders

Everyone with an interest in your business wants to know its financial health. This includes managers, employees, and investors. Annual business evaluations provide you with the information you need to demonstrate strong financial health or show progress to all relevant stakeholders.

Modern investors want to see how their investments are being used. It’s the only way they can continue to back the company. So, if your business model hinges on attracting and retaining investments, you need to take your yearly business assessment more seriously.

Most stakeholders will value your transparency. Everyone wants to see how their investments perform from year to year.

If you’re looking to attract a fresh injection of financing, you can’t afford to miss your annual business evaluation. The latest figures will instill confidence in potential lenders and investors, increasing the likelihood that they will back your business.

Beyond investors, the best employees in your industry are more likely to work (or keep working for you) if the annual valuation shows that the company is heading in the right direction. Many people value being in an environment where they can comfortably relax and build a career.

Ensures More Informed Risk Management

All business owners want to make decisions that will lower their risk profile. It’s one of the key ingredients to longevity and success in any industry. An annual business valuation will provide you with all the information you need to avoid taking on too much risk.

A professional business evaluation will clearly show your long-term, depreciating assets. It will also highlight your solvency ratio, which will help you decide whether your business can take on more debt or not.

Overall, the valuation will help you see if you can be more flexible with your risk threshold or adopt a more risk-averse stance over the short to medium term.

Provides a Benchmark To Measure Progress

One of the first lessons you’ll learn as a business owner is that no two years ever end up the same. How do you measure growth each year in such a topsy-turvy environment? Many business owners simply look at revenues or pre-tax profit. However, the value of your business goes beyond those numbers.

An annual business valuation provides a clearer picture for you to work with. You can look back at the valuation for this year compared to the last one to see how much progress your company has made.

You can treat the valuation like an annual report card that highlights areas in which you’ve excelled and where you should put more effort.

Ensures Better Resource Management

An annual business evaluation that covers all the details will show you what parts of your business have lagged behind. You’ll know which areas of your business need attention, which areas you need to nurture, and which ones are ready to blossom.

Thus, you can focus on allocating more time and resources to the things that matter. Think of the evaluation report as your resource allocation template going into the new year.

Creates a Culture of Continuous Improvement 

An annual business valuation shows that your business values learning from history, accountability, and reflection. Entrenching this culture throughout the company can lead to micro reflections across the board, pushing all employees and key players to continue exploring ways to better their previous results.

It’s no surprise that many front-line staff and managers implement processes to glean insights from customer preferences, industry trends, operational challenges, and more after a company performance assessment indicates underperformance for the period under review.

Provides More Insight Into the Industry at Large

Your business is the main focus of an annual company evaluation. However, the valuation would be incomplete if it didn’t widen out in scope to evaluate the rest of your industry.

So, the business performance review will look at market trends and what the landscape looks like in terms of competition, risks, possible changes, and more. As a result, you can stay ahead of the competition and not get taken unawares by any major shifts in the industry.

Encourages Proactive Decision Making

Annual business evaluations are highly effective at turning business owners into proactive planners. If you’re a reactionary decision maker, you will likely find yourself putting out fires more often than not.

By making proactive decisions, you can avoid crises and save time, money, and energy. An annual business valuation will highlight possible crises and provide the ingredients for preparation.

Ensures Better Succession Planning

The valuation from five years ago won’t suffice when it comes to succession planning for today. Annual valuations help ensure a smooth transition to a new owner or partner when it’s time to call it a day.

Provides More Clarity and Focus

Knowing how much your business is worth brings a level of certainty and peace of mind. You’ll feel better knowing the worth of your business and what it means for your finances. If you’re unhappy with the value of your business, you can make financial decisions with clarity and laser focus.

For example, the business valuation reports will tell you if you should prioritize expansion to a new service area or hire more workers to further focus on your existing market. They will also show you if the debt you’re about to incur for new equipment is a good idea or not.

Get A Professional Annual Business Evaluation From Murphy Business Brokers

It’s important to understand the value of your business, whether you have plans to sell or not. However, getting that first or second valuation isn’t the end. As long as your business continues to operate, the valuation will continue to change from year to year.

A professional annual business evaluation offers the surest way to stay on top of these changes. At Murphy Business Brokers, we provide annual business evaluations for businesses of all sizes. We provide holistic, actionable valuations that can help you make better business decisions or smoothen your succession planning.

Call our office in Sacramento, CA, today to schedule your next evaluation with our highly experienced team.

More About Terry:

Buying or Selling a business can be a stressful and often confusing process. As a business broker, I bring years of valuable, personal experience to help you through the process. For my buyers and sellers, I provide professional valuations, confidential listings, automated buyer inquiry systems, and stay in touch throughout the entire process with regular check-ins. By keeping an eye on the goal, the successful transfer of a business, we will work together to make it happen as quickly and smoothly as possible.

 – Terry J. Watts

Call Now