As Stripe proves, knowing the value of your business is integral to planning the future direction of the company, advises Keith McDonagh, director of Corporate Finance, Xeinadin.
Whether you’re a small, medium or large business, knowing the value of what you have is pivotal to future planning. Not only does it provide your business with a roadmap for growth, but it gives you clarity, focus and a clear picture for you to make informed decisions moving forward.
Take Stripe, for example, a company whose star just keeps on rising. The online payment giant was already ranked as the world’s biggest privately-owned fintech company.
“A business valuation is the ultimate snapshot of your current financial position”
Then earlier this year amidst widespread rumours of a public flotation, it scuppered all expectations with a high-profile announcement of another employee share sale round. With the tantalising detail that the company’s valuation ahead of said sale had leapt close to 50% to now stand at $91.5bn.
This is a perfect illustration of the importance of business valuations in strategic decision-making. Stripe has held employee share sales before; however, reevaluating the company, especially in the expectation that its value has increased, lays the groundwork for releasing liquidity from the company and raising capital.
And, perhaps, provides the rationale for declining to pursue an IPO. You might think business valuations are only for the likes of Stripe, but the principles they have taken still apply no matter what size of business you have.
The roadmap
There are 5 main reasons to pursue a valuation:
- Gain Financial Clarity and Confidence
A business valuation is the ultimate snapshot of your current financial position. It takes into account your balance sheet, profit and loss accounts, cash flow, assets and liabilities – everything that a would-be buyer (real or theoretical) would consider in putting a price on your business. Clarity around the value of your business is particularly beneficial if you are looking to secure financing or attract investors. And as the Stripe example perfectly illustrates, you can approach the process with confidence.
- Prepare for Strategic Growth
Are you aiming to expand your business with new premises, enter a new market or launch new products? A business valuation provides you with a roadmap for growth. By understanding the current value drivers of your business, you can identify which areas hold the most promise for future investment. This way, you can prioritise initiatives that enhance profitability while lowering risks. On the other hand, the valuation process often uncovers operational inefficiencies that, once addressed, can significantly boost overall performance.
- Strengthen Negotiating Power
Whether you are considering a merger, acquisition, or partnership, working from the basis of an accurate valuation of your business is absolutely essential during negotiations. An independent valuation acts as an unbiased benchmark that can help you secure better terms and is formalised through the process of purchase price allocation (PPA). It ensures that you are not undervalued in a deal and allows you to negotiate from a position of strength.
- Support Succession Planning
For many business owners, succession planning is one of the most challenging aspects of long-term strategy. A business valuation not only clarifies what your company is worth today but also provides a framework for future planning. It can highlight potential areas of growth or concern that may affect the transition process. Whether you’re planning to pass the business on to a family member, selling to a partner, or bringing in external leadership, a well-documented valuation can ease the transition by ensuring that all parties have a clear understanding of the company’s value.
- Embedding Sustained Success
A business valuation is more than just a snapshot in time – it’s an ongoing tool for sustaining success. Regular valuations can track your progress, allowing you to make proactive adjustments in response to market shifts. This continuous monitoring helps you stay ahead of industry trends and competitive pressures. Periodic valuations help to benchmark progress and bring certainty to the pursuit of strategic goals.
These five key reasons will give your business a clearer direction, stronger foundations, and a greater chance of long-term success.
Part of the norm
A business valuation is more than just a financial exercise; it’s an essential diagnostic tool for any company, no matter the size.
It should be the norm to consistently evaluate. For the purpose of strategic decision making, you’d be doing your company an injustice by not taking the time to utilise a tool that will be of significant strategic benefit.
Key Takeaways from the Article
- Valuation = Clarity
It gives a clear picture of your financial health, which is crucial for making informed decisions. - Strategic Growth Planning
Knowing your value helps identify growth opportunities and operational inefficiencies. - Negotiation Leverage
A valuation strengthens your position in mergers, acquisitions, or partnerships. - Succession Planning
It supports smooth transitions by providing a shared understanding of the business’s worth. - Sustained Success
Regular valuations help track progress and adapt to market changes.
Main image: John and Patrick Collison, the Irish co-founders of Stripe, a business that definitely knows its worth
-
Bank of Ireland is welcoming new customers every day – funding investments, working capital and expansions across multiple sectors. To learn more, click here
-
For support in challenging times, click here
-
Listen to the ThinkBusiness Podcast for business insights and inspiration. All episodes are here. You can also listen to the Podcast on:
-
Spotify
-
SoundCloud
-
Apple
