Why should you know the value of your company?

Kārlis Krastiņš

Prudentia managing partner

The mission of the TOP101 project of the most valuable companies of Latvia is to encourage public discussions about business value and the factors affecting it, which the creators of TOP101 — Prudentia and Nasdaq Riga — have been doing successfully for 17 years.

Unfortunately, the opinion that an interest in the value of one’s company will be important only at the time of its sale or financing is still relevant in Latvia. However, business valuation is important at any stage of development, both during financial planning and negotiations with potential investors and while creating a succession plan. It provides a detailed overview of the company’s financial position, helps to make informed business decisions and also to prepare for possible future transactions, even if you do not plan to implement them soon.

However, there are situations when a proper understanding of your company’s value is critical to the achievement of both your personal and business goals.

Business development

If you plan to grow your business, it is essential to understand and identify what the reference point is and what goals you want to achieve. The assessment of the company today will show its state before the implementation of the development plan, later it can be used to compare whether the development and the investments were successful and how successful they were.

It is also important that a business valuation report will provide a detailed assessment of the factors that negatively affect the value and that the owner should improve, such as unstable cash flow, disorganized internal processes and others. The company’s strategy, which includes its assessment, can help to avoid inadequate investments and expenses, as well as to identify the measures and factors that positively affect the growth of the company.

Sale of the company

If you are planning to sell the business you own, it is very important to know its true value. Owners often do not even realize how valuable their business is. It would not be wise for you to sell the company to the first investor who came to you at the price that you offered. Selling a business is a complicated process that requires timely preparation. It is the valuation that can serve as the basis for a plan to increase the business value, but consistent implementation of this strategy will allow you to improve financial indicators and achieve the business value for which you are ready to sell your company.

Attraction of investments

When the need or opportunity arises to raise investment or private equity investment for the company you own, decisions often need to be made quickly. Only the owner who understands the value of his business can take full advantage of the opportunities offered by the market. A company’s valuation covers a compilation of its history, legal structure, financial information and a host of other factors. For potential investors, an up-to-date valuation is like a company’s CV - it captures the profitability of the business in current market conditions. If you are looking for investors, regular evaluation of the company with the aim of gaining a true understanding of its value and facilitating its growth is part of the business strategy.

Succession planning

Many business owners put their heart and soul into the business, hoping it will provide financial freedom in old age, but a deep emotional connection to the business can make it difficult to appreciate its true value.

Valuation of the company will give you an in-depth picture of what the business is worth right now. Whether you are planning to retire by selling it or handing over the management of your business to the next generation, it is a process you need to prepare for. In the event of a sale, the appraisal will help to determine the price and terms and conditions that would be convenient and beneficial for you as you gain financial freedom. On the other hand, if the succession is realized within the family, the value can serve as a reference point for the transfer of the company to the next generation, including both its active and passive members.

Business expansion

For the owners planning to expand their business or expand geographically, an up-to-date business valuation report is an extremely useful tool. It provides an accurate benchmark for the industry and can make it easier to attract funding from lenders and financial institutions to realize your ambitious plans. Regular business assessments highlight the areas that need attention in a business expansion strategy and help to track the impact of the business decisions on the company value.

Implementation of the exit strategy

Each exit plan must meet the owner’s business and personal goals. A successful exit also requires considerable planning. Business assessment helps to define the reference point of the planning process and, based on the objectives of the exit strategy, to define an achievable result. Regardless of the exit strategy you choose (IPO, management buyout, M&A or other), regular business assessments will give you a clear picture of your company’s financial condition and help you to achieve the best possible outcome when the time comes to “exit” the business.

Asset protection

Divorce, legal disputes or even the death of the owner are life milestones that are difficult to talk about, but it is important for any entrepreneur to ensure that assets are protected for the future. The heirs, who should take over the company in an emergency, do not know its true value and therefore are unable to effectively implement the business growth strategy. An in-depth understanding of the business value, based on regular independent assessments, provides the entrepreneur with the protection of his personal and business interests.

The purpose of an independent company valuation is to help the entrepreneur to understand the true value of the business and its influencing factors. Such an assessment can become the basis for important decisions, because only the entrepreneur who knows the true value of his business can fully use the opportunities offered by the market.