Face Value

Face Value

Valuations are powerful business tools but may not serve as an accurate business benchmark to track growth or performance. Learn what differentiates the two.

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September 4, 2019

 

While they’re powerful business tools, owners or managers may be misguided using professional valuations of their companies as benchmarks to track growth or performance. In fact, business consultant Patrick Ungashick suggests valuations may be considering the wrong things to serve as an accurate benchmark.

Owners and top managers of privately held companies often turn to business valuations when its highly prudent to gain an accurate financial assessment, says Ungashick, the CEO of NAVIX Consultants, which helps facilitate executive exit planning. For example, they’re vital during a partner buy-out, or when dividing assets in the event of a divorce. However, while a valuation is an important business tool, Ungashick says they’re often misunderstood, unnecessary or can be counterproductive to an overall business strategy.

A valuation is not entirely inward looking, he says. A well-done valuation also looks at the outside situation – the economy, the market, and the industry the company operates in.

“If I’m a business leader looking to find some way to objectively evaluate how well my company and my employees are doing, right away you have data coming in that is no addressing how your team is doing,” Ungashick says. “Because I may be in a high-growth industry, or everyone else in my industry is growing 15%-20% per year. In that situation a valuation would show an ever-rising number … but it might not be because of the leadership team I have in place is doing a great job. Rather, everyone is getting pulled up at the same time.”

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The key question that must be asked when considering a valuation is what are you trying to accomplish?

So, a valuation may be aimed at the wrong things, or it may just be overkill. If you’re really looking to track company growth, Ungashick says any company will have a handful of key activities that drive growth for that particular company.

“Any company is going to have key metrics that you can measure internally easily – like revenue or earnings before interest, tax, depreciation and amortization (EBITDA),” he adds. “Those internal metrics will really answer the questions: How is my team doing? How’s my company growing?”

Ungashick adds the key question that must be asked when considering a valuation is what are you trying to accomplish?

“If it involves complex tax planning, or whether you’re on the same page as your business partner or spouse, then in those situations a valuation might be helpful,” he says. “You need to be clear about the outcome you’re pursuing, then answering the valuation question will be much clearer.”

Mike Zawacki is editor of Snow Magazine.