1. Strategic goalsetting
Assessing the value of a business sets the foundation. It allows you to set future goals and observe any inefficiencies, determining the segments of the company that offer added value and those that need improvement or create/destroy value.
Most companies have a strategic business plan in which they outline their goals and objectives. Performing a valuation at the formulation phase of the strategic planning cycle can enhance the determination of future goals and objectives. By identifying strengths and weaknesses, management will have a distinct idea of the areas to focus on and can try to eliminate activities that typically result in wasted or underutilized resources.
Many organizations struggle with monitoring the progress of their strategic objectives. However, using a valuation as a measuring stick can help identify gaps between their current statuses and long-term objectives, assisting in efficient decision-making. With the trend of investments in non-traditional measures of value such as ESG, a valuation can be a powerful tool in managing the business and enhancing its value.
2. Accountability and measurement
An independent valuation provides an objective report on factors that add utility or devalue the company, as well as potential opportunities and threats in the industry. By identifying future threats, a valuation can also assist in an organization’s risk management framework and set and monitor objectives in alignment with international standards.
A valuation can add transparency and accountability, which stakeholders demand. An entity’s public perception and how employees view it can also determine goodwill or social value, which may lead to opportunities for unconventional financing and incentives like employee share ownership. Thus, it is important for an entity to assess how non-financial goals translate into value.
For publicly listed companies, a valuation adds a layer of transparency to determine the perceived value of the shares. This can assist management in its strategic plan if it has a desire to perform share buybacks or even something as routine as an investor communication strategy.
3. Succession planning
In the Caribbean, many companies are either owner-operated or family-owned, and the issue of succession planning continues to be at the forefront for these multi-generational businesses.
This issue becomes even more relevant for companies facing a fair number of soon-to-be-retired executives. An entity’s assessment can expose these key-man risks and assign a value to these individuals. This can assist the organization in determining the replacement costs of such individuals and how to prepare for such an event. Conversely, if management seeks an outright sale, the value perceived through an analysis of present and future factors will guide its decision to sell or continue investing in the company.
4. Securing financing
Understanding your company’s value can assist in funding negotiations, whether it be from banks, private equity, or capital markets. An independent valuation can make it easier for potential investors to assess the risks they are about to undertake regarding a potential transaction.
In Trinidad and Tobago, the Small and Medium Enterprise (SME) stock exchange was and can be an excellent means of raising the needed funding for some of these companies. Additionally, listing on the stock exchange has the added benefit of various tax benefits. This has been a huge success in Jamaica, allowing the development of their capital markets and business owners to unlock equity.
A company seeking to list can generate credibility for investors through a detailed valuation report as it provides a view of the company’s current prospects while outlining the difference in value that can be unlocked if the company accomplishes various milestones before seeking financing. Investors and business owners alike would do well to familiarize themselves with the different valuation methodologies and paths to unlocking value, allowing them to determine whether an investment provides sufficient return.
Business valuation is a complex but essential exercise. It assists in setting future goals and identifying inefficiencies, monitoring progress towards strategic objectives, and providing transparency and accountability. It can also be a powerful tool in managing the business and enhancing its value, identifying potential opportunities and threats and aiding in risk management. For businesses considering growth, succession planning, or exit strategies, a current valuation can provide a solid foundation for decision-making.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.