When should you value your Business?
Hint: It's not only when you are looking to sell
As a business owner, valuation is important for several reasons:
Sustainability
Providing you a detailed overview of your company’s sustainability not only today but over an extended period into the future.
Value Estimate
Estimating a concrete price range for your business and helping you identify who would find your business more valuable. This is important not only for selling the business, but for other forms of exit or succession planning.
Secure Funding
Helping secure additional funding by providing investors or financial institutions a reliable estimate of the value of your business.
Financial Health
Gives you a clear comprehensive picture of the financial health of your business, so you can address weaknesses and focus on strengths.
Protection
Protecting yourself and your family by acquiring the right types and amount of insurance.
Employee Shares
Set a fair price to award or allow staff to buy or sell shares in the business.
12 Situations that call for a Business Valuation
Sell or Buy a Business
Insurance
Raise / Secure Funds
Estate Plan
Succession Plan
Impairment Test
Bankrupcy
Decision Making
Employee Options
Litigation
IPO
Investments
Selling or buying a business is only one of the 12 situations listed above. Some reasons might be more relevant to you and a few are critical to the health of your business and the financial security of your family.
How Independent and Valuable is your Business
A couple of examples highlighted below illustrates the importance of valuation more clearly, specifically in regards to insurance and access to funding.
Insurance and Valuation
75% of Owners are under-insured and 40% have no insurance at all
The main reason for the insurance deficiency is that the owners cannot accurately measure their financial risk because they lack a current and accurate valuation of their business. Without the valuation they are missing the vital piece of information to secure the right insurance policies, with the correct coverage for their business.
When the owners understand the current value and key drivers of their business, they can adequately plan cover for some of the key needs such as:
Business insurance refers broadly to a class of insurance coverage intended for purchase by businesses rather than individuals. The coverage protects businesses from losses due to events that may occur during the normal course of business. Businesses owners seek insurance to cover potential damage to property, to protect from lawsuit, or contract disputes. There are many types of insurance for businesses including coverage for property damage, legal liability and employee-related risks
It is especially important for small business owners to carefully consider and evaluate their business insurance needs because they may have more personal financial exposure in the event of a loss. If a business owner does not feel he or she has the ability to effectively assess business risk and the need for coverage, they should work with a reputable, experienced and licensed insurance broker
Types of Business Insurance include:
Professional Liability Insurance
Professional liability insurance insures against negligence claims that result from mistakes or failure to perform. There is no one-size-fits-all professional liability coverage. Each industry has its own unique concerns that should be addressed.
Property Insurance
Property insurance covers equipment, signage, inventory, and furniture in the event of a fire, storm or theft. However, it doesn’t cover mass-destruction events like floods and earthquakes so these require a separate policy. Another exception is personal property that is very high value and expensive—this is usually covered by purchasing an addition to the policy called a “rider.” If there’s a claim, the property insurance policy will either reimburse the policyholder for the actual value of the damage or the replacement cost to fix the problem.
Home-Based Business
Homeowner’s policies don’t cover home-based businesses like commercial property insurance covers businesses. If you’re operating a home-based business, you will need to inquire about additional coverage for equipment and inventory
Product Liability Insurance
If your business manufactures products to sell, product liability insurance is very important. Any business can find itself named in a lawsuit due to damages caused by its products. Product liability insurance protects a business in such cases.
Vehicle Insurance
Any vehicles used for business should be fully insured. At the very least, businesses should insure against third-party injury, but comprehensive automobile insurance will cover the vehicle in an accident, as well. If employees are using their own cars for business, their own personal insurance will cover them in the event of an accident. One major exception is if a person is delivering goods or services for a fee, including delivery personnel.
Business Interruption Service
Business interruption (or continuation) policies are type of insurance is especially applicable to companies that require a physical location to do business, such as retail stores. Business interruption insurance compensates a business for its lost income during events that cause a disruption to the normal course of business.
Buy/Sell insurance is designed to manage the risk to the business if a business owner is forced to exit due to illness, injury or death. Buy/Sell insurance pays a lump sum that ensures the remaining owners can acquire the departing owner’s equity, and continue to run the business
Key Person Insurance is a life insurance policy that a company purchases on a key executive’s life. The company is the beneficiary of the plan and pays the insurance policy premiums. This type of life insurance is also known as “key man insurance,” “key woman insurance” or “business life insurance.” – Investopedia
Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to named beneficiaries when the insured dies. The insurance company promises a death benefit in exchange for premiums paid by the policyholder. – Investopedia
Disability insurance is a type of insurance that will provide income in the event a worker is unable to perform their work and earn money due to a disability. Disability insurance comes in many forms and can be obtained through a wide range of providers for a wide range of prices.
The price of a disability insurance policy depends on the length of the elimination period, the benefit period (how long a person is able to receive the disability benefit), and how strict the definition of disability is under the policy.
The two most common definitions are “own occupation,” where a person is considered disabled if they are no longer able to perform the occupation they had prior to becoming disabled, and “any occupation,” where a person is considered disabled if they are unable to perform any job at all.
Property insurance is a broad term for a series of policies that provide either property protection coverage or liability coverage for property owners. Property insurance provides financial reimbursement to the owner or renter of a structure and its contents in case there is damage or theft—and to a person other than the owner or renter if that person is injured on the property
Casualty insurance is a broad category of insurance coverage for individuals, employers, and businesses against loss of property, damage, or other liabilities. Casualty insurance includes vehicle insurance, liability insurance, and theft insurance. Liability losses are losses that occur as a result of the insured’s interactions with others or their property. For businesses, casualty insurance is an umbrella term traditionally used to describe many other types of insurance, including aviation, workers’ compensation, and surety bonds.
Without these key needs adequately covered, it is almost impossible for the owner to truly establish a safe and secure business.
VALUATION AND ACCESS TO FUNDING
It goes without saying that access to funding is extremely difficult for SMEs. According to the UAE Central Bank in July 2020, SMEs account for 94% of the businesses in the UAE but only receive 5% of the funding banks provide.
Reasons that the banks provide limiting funding to UAE SMEs include:
- Inadequate Financial Management
- Lack of collateral
- Abundance of one man shops, who being expats, provide an increased risk of flight.
A business valuation with a proper business structure set up for a successful future exit, helps eliminate many of these perceived risks and increases access to funding. Through the successful implementation of the Sophiall Solution, a company can approach banks with the following characteristics:
- Robust and comprehensive financial records that banks and investors seek
- An established management team inspiring confidence in the operations of the company
- An independent business not reliant on the Owner, or any one or a handful of key customers, suppliers, or employees.
- Much stronger in the other value drivers than industry peers
Companies with these positive characteristics are much better positioned to access both more funding options and the desired money they seek.
Emergency Funding Needs and not being Prepared
Access to funding might become a critical need due to an emergency or unforeseen event that puts the business and your financial security and future at risk. As a business, if you have not prepared for a potential future exit and opimised your key business value drivers, you will be caught flat footed when the emergency arises.
Since successfully preparing your business for a potential exit can take years, it is critical to start the planning from today; even if you have no plans to sell or exit until far in the future. As the financial crisis in 2008, and Covid in 2020 clearly illustrated, you must prepare for the unexpected. The ability to access funding can become the key factor of whether your business thrives, barely survives or goes under.
The Sophiall Solution will guide you in optimising and preparing your business to thrive independently and enable you to have the option to exit more successfully at a time and at terms of your choosing.