Why Not Knowing Your Business's Worth Could Cost You Millions
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"What’s your business worth?" is a difficult question to answer, especially for small businesses. In fact, according to a 2014 IBISWorld report on "Business Valuation Firms in the U.S.," 98 percent of business owners don’t know the value of their company; those that do tend to be large companies that have the finances and resources available to them to find out. For the remaining 200 million small businesses, valuing their business seems to be both impractical and out of reach.
Business valuation is difficult for two main reasons: time and cost. In conducting research for our book What's Your Business Worth?: The Entrepreneur and Advisor's Guide to Discovering, Monitoring, and Optimizing Business Valuation, Daniel Priestly, Scott Gabehart and I found that offline valuations can take between four to six weeks to complete and can cost upwards of $8,000. This amount of money and the resources that must be funnelled into the process are often too costly for a small business to take on, and as such, valuation doesn’t become high on the list of priorities.
Being unaware of valuation information means that business owners do not have sufficient insight into key areas of optimal knowledge, such as the right capital structure for the business, and the proper insurance coverage needed to protect it. This in turn can cost them thousands of dollars each year that they simply cannot afford to lose. In fact, the 2013 Global Entrepreneurship Monitor Report, produced by Babson College and other universities, found that the top reasons for discontinuing a business in the U.S. were problems obtaining financing -- an issue that can be directly related to poor valuation knowledge.
Keeping up-to-date on their business valuation helps owners to make important decisions for their company, including when to raise capital and how to ask for capital or a loan from investors or banks, understanding when to exit and their exit strategy and when to purchase another business in efforts to strengthen their own offering. An inaccurate business valuation can cost a business millions, either by the owner selling it for too little or by paying too much for a company they’re acquiring.
When it comes to knowing how a business valuation strengthens a business, knowledge is always power. It gives business owners the ability to remain ahead of their competitors and potential purchasers, keeping owners well prepared for any situation or offer that comes their way.
One has to think that this must all seem rather daunting for small businesses; for the most part they understand the importance of valuing their company, but lack the necessary resources to do so. Luckily, we have seen an increase in the democratization of big data -- small, purposed data insights on a particular sequence of questions or on a particular insight -- throughout the financial services sector to give business owners more access to the information they need to help them reach their highest potential.
Big data makes business insights more readily available, less intrusive, easier to access and most importantly, can be achieved in less than 10 minutes and at a tenth of the cost. The availability of big data allows business owners to obtain accurate and reliable online valuations and gives them the freedom to make decisions that they otherwise would have gone into blindly. When they understand their business value, owners are able to improve their performance on all fronts and become more competitive in their respective market.
The introduction of big data works to the benefit of small businesses but can work against the financial services industry. Unless they begin to provide more services and products to help business owners gain the insight, knowledge and transparency they need to run their business at its full capacity, fintech innovators will overtake this industry. However, if they can embrace new technologies that support the growth and democratizing of knowledge and efficiencies for small busineses, we expect we will see improved benefits for small businesses and growth in the overall financial services industry.