Why SMBs Must Prioritize Business Valuation?

Knowing your company’s genuine market value is useful for more than just selling it or attracting investors – it helps you understand its inner workings, the potential returns it could generate, and its prospects.

The reports help analyze a company’s operation efficiency and growth at each stage, particularly for small and medium-sized businesses (SMBs). SMB business valuation report also helps in:

• Understanding your business worth
• Strategic planning and growth
• Attracting investors and obtaining financing
• Employee Stock Ownership Plans (ESOPs)
• Mergers & Acquisitions

Given its prominence, conducting an SMB business valuation by third-party valuers is essential to producing an unbiased valuation and picking the right method to implement it. Let’s examine the benefits of a business valuation when done right, including its methods and concerns.

Why Do SMBs Need Business Valuation?

As an SMB owner, you know that your company needs a valuation. But for what? Let’s see that now.

Understanding Your Business Worth

First and foremost, you will understand your company’s worth through SMB business valuation, which helps improve financial management and make informed decisions.

Strategic Planning & Growth

Strategic planning is the base for your SMB to grow. By having an SMB business valuation, you will get a clear picture of your company’s:

• Total assets
• Financial standing
• Market position

All these can help you make a strategic plan that works for your company’s growth. SMB business valuation helps business owners to have proper planning for:

• Market Expansion
• Resource Allocation
• Overall organizational growth

It will help you identify potential challenges and proactively mitigate them.

Attracting Investors or Obtaining Financing

SMBs thrive on fundraising efforts. A high SMB business valuation puts you in a better position to attract investors and raise enough funds. If your SMB valuation is high, investors will be interested in investing as they believe in your growth potential and good Return On Investment (ROI).

Employee Stock Ownership Plans (ESOPs)

As a small business, you cannot afford to pay high wages to your employees, but you still need them for your company to grow. In that case, you can give them stocks as part of ESOP, which provides them with company ownership.

SMB business valuation helps you issue stock ownership to employees to ensure a fair distribution of shares and legal compliance.

Mergers and Acquisitions (M&A)

Knowing your company’s worth can help you set realistic valuation goals and negotiate fair deals during M&A transactions. So, if you are considering acquisitions or partners, you need an SMB business valuation is mandatory.

Common Valuation Types for SMBs

There are various valuation types available based only on your needs. They are:

409a Valuation

A 409a valuation is an independent appraisal conducted to know the Fair Market Value (FMV) of your company’s common stocks at the issue date. Any SMB that decides to offer ESOP to their employees needs a 409a valuation to comply with the IRS regulation. It determines the strike price of the stocks the employees receive.

As the market sets the stock price for public companies, a 409a valuation is required by law (section 409a of the IRS) for private companies that issue stocks. The IRS has the rule that the strike price should be at or above the value of FMV determined by the 409a valuation.

By complying with the IRS regulation, your SMB will be under “safe harbor” status, allowing you to grant stocks. In the cases of undervaluing, the IRS can levy up to a 20% penalty on stock options that vested before the tax year.

When will you need a 409a valuation?

A 409a valuation is valid for 12 months, and you will need an independent third-party professional to conduct the valuation after that period to reflect your company’s correct stock value. Apart from that, the following are the scenarios when you will need a 409a valuation:

• Whenever there is a material change – additional funding rounds and any financial or operational change.
• When considering going public or looking for Mergers & Acquisitions.

Choosing the right valuation experts who match your requirements is important for an effective 409a valuation and eventually providing stocks to your employees.

Asset Valuations

Asset valuation methods determine your company asset’s fair market or present value. It involves using:

• Book value
• Discounted cash flow analysis
• Option pricing models
• Comparables and more

Asset valuation includes tangible assets (E.g., buildings and equipment) and intangible assets (E.g., Patents and trademarks).

Valuing tangible assets

Assets with a physical form that the company purchases to produce their products/ services fall under the “tangible assets” category. To know its value:

• Step 1 – Look at your balance sheet to identify tangible and intangible assets.
• Step 2 . From the total assets, deduct the value of intangible assets.
• Step 3 – What’s remaining is your company’s tangible assets. Now, deduct it further from the total liabilities.

The final value is your SMB’s tangible assets.

For example, If your SMB has:

• Balance sheet total assets: $4 million
• Total intangible assets: $1.5 million
• Total liabilities: $1 million

Then your total tangible assets will be =Total assets – Tangible assets – Total Liabilities. Which will be $1.5 million

Valuing intangible assets

On the other hand, intangible assets do not have a physical form but still add value to your company. Even in bankruptcy cases, when none of the company’s physical assets have value, they can still be valuable based on their intangible assets, such as logos, trademarks, and franchises.

Asset valuation can help showcase your total assets, including intangibles, to potential investors, giving them an idea of your SMB’s worth and possibly leading to fundraising.

Mergers & Acquisitions (M&A) Valuations

M&A valuations tell your company’s worth during M&A transactions. Having a proper business valuation during mergers and acquisitions will help you negotiate better and get a fair deal. This is the primary document investors look at to decide whether to proceed with investing in your company.

Key factors influencing the M&A valuations

Below are the major factors influencing the M&A valuations:

• Considering your product’s industry’s overall health and growth potential is important. Buyers will be interested in companies that are expanding industries with potential profits in market share. Also, your company’s competitive advantage in the industry always plays a huge role in attracting target buyers or partners.
• The company’s past and projected financials affect its valuation. This includes analyzing your SMB’s:
  • Profit margin
  • Growth rate
  • Revenue growth and
  • Debt levels
• The value of a business heavily depends on its current clientele and strategic alliances. Those who have:
  • Established partnerships with key industry players
  • A dedicated customer base and
  • Strong customer relationships

All of these make them a desirable acquisition candidate.

Potential investors want to invest in growing businesses with diverse, low-risk client bases and mutually beneficial companies.

During M&A transactions, companies use various methodologies to determine the SMB business valuation. All these methods focus on providing the company’s accurate value to attract investors.

Co-Founder-Related Valuations

To guarantee fair equity splits among co-founders, a company can use the following methodologies:

• Equal partnership approach – Each co-founder receives an equal stake in this approach. This belief comes from the fact that each partner contributes equally to the business’s success.
• Transactional approach – The question “What do I get in return for what I put in the company?” is the basis for this approach. The co-founder’s contributions, including:
  • Idea
  • Time
  • Money
  • Relationships
  • Equipment
  • Supplies
  • Other assets
• Each of these distinct assets is listed and assigned a value. Each co-founder gets a certain percentage of the company’s equity based on the value of the assets they invested in.
• Relational approach – This is a common method most companies use. Under this approach, each co-founder contributes equally to the company’s outcomes.

Get support from valuation experts to ensure your company follows any of the above mentioned approaches based on its unique situation.

Tax-Related Valuations

Below are the common tax-related valuations a business may be subject to:

HMRC Valuations (UK)

Share valuations are crucial when determining the amount of shares or stock options to give to a particular employee. HMRC Shares and Assets Valuation (SAV), the body responsible for determining the market value of shares for private companies, must approve your proposed share valuation.

HMRC approves business valuations to grant options under the UK’s EMI, SIP, or CSOP plans. Although not required, a UK company and its              employees can receive substantial tax benefits by having their company valued by HMRC.

Gift/Estate Tax planning

Gift or estate tax can be incurred on the transfer of assets, whether during a person’s lifetime or after death. The United States Internal Revenue Service (IRS) mandates determining the asset’s Fair Market Value (FMV) at the time of transfer to assess tax liability.

An accurate valuation is necessary to avoid paying too much or require proof that you spent the correct amount in case of a tax dispute. Having your assets valued is crucial when deciding how to distribute them to your beneficiaries, particularly if some of your assets are hard to price, like real estate or shares in a closely held company.

Common valuation concerns SMBs face

While conducting SMB business valuation, the company may encounter the following concerns:

• Limited Data and Access to Resources – Small and medium-sized businesses (SMBs) may require additional resources and data. These include:
  • A smaller budget
  • Not as sophisticated accounting systems
  • Restricted availability of market information
• Dependence on Owner/Founder – Many SMBs mostly depend on their business owner’s knowledge and experience. These businesses sometimes fetch lower SMB valuations because there’s a chance the company won’t do well if the owner quits.
• Industry-specific Challenges – Different industries may have varying challenges that affect the SMB business valuation. The factors include ,recognizing intangible assets, regulatory risks, competition and market trends.
• Market Perception and Brand Value – Market perception influences customer behavior, eventually impacting sales and profits. A positive market perception can lead to higher SMB business valuation and vice versa.Also, your brand’s worth is important for a higher SMB valuation.
  • Brand value includes Brand equity, financial performance, goodwill and more.Maintaining good market perception and brand value helps in having a higher business value.
• Risk Assessment and Future Prospects – You should evaluate the possible risk to have a correct SMB business valuation. It covers thinking about:fluctuations in the market threats from competition and operational risks

Your company’s prospective expansion and flexibility to adjust to shifting market conditions can also affect SMB valuation.

Key steps a business valuation firm of professional can help SMBs with their valuation

Every SMB will need an accurate business valuation. How do we make that possible? Getting support from valuation experts is the best choice to ensure it. The following are the important steps that the professionals will consider when conducting the SMB business valuation.

• Selecting appropriate valuation methods – Several methods exist for an SMB business valuation. Which one fits your company? It depends on various factors. At Eqvista, we have experts who can help you choose the most suitable valuation method to arrive at an accurate SMB valuation.
• Determine the right valuation multiple – There are various valuation multiples, including: Seller’s Discretionary Earnings (SDE) Multiple EBITDA multiple and more. Picking the correct one will affect your business’s worth. Eqvista’s business valuation process considers this and uses it to its advantage when calculating the appropriate multiple for a reliable report.
• Providing independent professional assessment – The needs of various businesses in valuation vary. Eqvista’s business valuation team recognizes it and provides expert assessments for small and medium-sized enterprises. To guarantee reliability, we offer an impartial and precise valuation report.
• Identifying intangible assets and risks – As an SMB, you might have several intangible assets. Why is it important to recognize it? Locating intangible assets can help companies know their real worth. Eqvista’s business valuation team helps you to identify these intangible assets.
• Ensuring compliance with regulations – Conducting a business valuation might be one way to ensure compliance with all applicable rules and regulations. Eqvista’s business valuation can help your organization maintain transparency and compliance.

Get your Business Valuation Services from Eqvista!

Consulting with valuation experts can help you get the most out of your SMB valuation. With a team of skilled business experts, Eqvista provides thorough, data-driven business valuation reports that ensure credibility and legal compliance.

Our valuation reports include various qualitative analyses to derive results. All approaches and methods are tailored to each client’s industry and needs. Our reports clearly explain how each valuation was arrived at and the considerations involved. Contact us for customized reports. Learn more about Eqvista’s business valuation services by requesting a demo.