Amid all the stress of efficiently managing your company’s day-to-day operations and meeting your monthly sales targets, the importance of knowing your business’ financial worth can often be lost along the way. As a smart entrepreneur, it’s imperative to stay up to date with the current market value of your company even if you don’t intend to sell it any time soon. But before you look into the top trends in small business valuation, it’s essential to understand why business appraisal is crucial to your startup’s success.
Why Put a Value on Your Small Business
Determining the monetary value of your company is necessary for various reasons.
To begin with, it gives a clear idea of whether or not you are headed in the right direction. Business valuation facilitates efficient planning and assists in conducting partner buy-ins or buy-outs as well. It is also useful in attracting investor capital and helps in arranging bank financing and other lines of credit.
If you view your small firm somewhat as a golden egg for your retirement nest, regular valuation of your business is just as important as meeting the daily or annual revenue goals. After all, you wouldn’t go years without checking your bank balance, right? Business appraisal is no different.
Consider the possibility of receiving an unsolicited yet lucrative purchase offer for your company. Knowing your business’s real market value beforehand can help you make the right decision on time. But what determines the actual market value of a company?
Interestingly, there’s a lot more involved than just the numbers on a balance sheet. From intellectual property and cash flow to hard assets, trade secrets, public reputation, and more, various factors all come into play.
Being in the midst of a crisis where the future of the world economy looks uncertain, it’s now important more than ever to know what your company is really worth.
Trends in Small Business Valuation
India’s economy is expected to grow by 8% this year but slow down to about 5% in 2022 [1]. However, certain characteristics can make a business more susceptible to a sustained rise in its net value.
Following are some of the key company aspects that can have a major impact on small business valuation these days.
Online Operational Capacity
As the world adapts to the new normal encompassing social distancing, work from home and similar changes, a business’s online presence has become of utmost importance in determining its success. People around the world are now running multi-million dollar companies from the comfort of their homes. What’s more interesting is that even their inventory is kept in virtual warehouses, and there’s hardly a need to meet a client or vendor face to face.
In other words, your business should be able to attract and serve a large customer base every day using only online platforms. Businesses that have the capacity to operate fully online and invest a significant share of their total retail revenue into streamlining their online operations are valued higher than those who don’t.
Cyber Security and Compliance
With online business operations comes the risk of falling victim to cybercrime. Being internet-driven is unlikely to raise your company’s financial worth alone unless you pay special attention to ensuring cybersecurity for customers, investors, employees, and other stakeholders.
In the wake of the pandemic, cyberattacks have become more common in India, just like in many other countries across the world. According to a leading technology research company, Cybersecurity Ventures, cybercrime can lead to a worldwide loss of up to $6 trillion if due measures are not taken on time [2]. Over the course of last year, almost one in every three companies worldwide reported having experienced a cyberattack while videoconferencing using external apps like Zoom and Microsoft Teams. In India, the figures were more alarming as nearly 66% of all local companies reported facing similar threats [3].
Various small enterprises in India’s high-tech cities like Bangalore and Hyderabad are already ramping up their security against the growing threat of cyberattacks. In addition to protecting your network, software, and programs from hackers, you also need to safeguard customer information. A breach in sensitive client information such as their bank account details can cause irreversible damage to your brand image and, in turn, your business valuation. Opting for a cyber insurance policy is another smart way to mitigate the risk of cyberattacks and increase your company’s net worth.
Moreover, businesses that provide cybersecurity, particularly in online transactions, are sure to notice an increase in revenue as customers feel more confident making payments over the internet.
Growth Prospects
Growth prospects illustrate how much potential your business has to succeed in the coming years. The potential for growth may be evaluated with respect to the industry you operate in or even as a standalone feature of the company based on its own unique offerings.
Take Blackbuck, for instance. Founded in 2015, this online truck aggregator startup has become India’s leading trucking network in just under five years. Since the company focuses on business-to-business services, providing shippers with proprietary solutions for freight transportation, it has even more potential for growth. This is one of the main reasons why it is perceived as a future ‘unicorn’ and thus, valued at over $1 billion! [4]
On the other hand, Lendingkart is headed for entering the coveted unicorn club due to its distinctive finance solutions. As an online financial service, the company helps thousands of entrepreneurs and small business owners with Working Capital Loans. Given the fact that India has the third-largest startup economy in the world, the company definitely has an impressive growth prospect.
Ending Note
When it comes to small business valuation, it’s essential to remember that there are many different trends and methodologies for business appraisal. Some methods might weigh earnings more heavily, whereas others might assign greater value to hard assets, strength and depth of management team, market concentration, company’s location, and the likes. Simply put, your business valuation can vary radically according to the appraisal method and the ultimate goal of investors or other stakeholders. Generally, it’s a good practice to consult a professional appraiser for evaluating your company’s net worth so you can make the right decisions at the right time.
References:
[2] https://asia.nikkei.com/Business/Technology/Indian-IT-companies-step-up-fight-against-cyberattacks
[4] https://inc42.com/buzz/blackbuck-gets-the-unicorn-tag-at-1-1-bn-valuation-looks-to-raise-43-mn-more/
