A business valuation may be performed at some point in a company’s existence for various reasons. In some cases, a business may simply wish to understand its value, but for the most part, there will be a specific reason that the valuation analysis is sought. It often relates to investment decisions, exit planning strategy, a potential sale or buyout, or because of an impending IPO.
To receive the most accurate valuation possible, it is usually best to hire a reputable valuation service. This can obviously be quite costly, not to mention rather taxing given the amount of information that will have to be collected and analyzed. For larger businesses, the complexity and time-consuming nature of the process will likely serve as a deterrent to engaging in regular valuation assessments.
However, the economic climate is frequently in flux, influencing the financial status of virtually every company around, so there are likely businesses who will find an annual valuation analysis to be desirable. Although there is no hard and fast answer as to how frequently a business valuation should be performed, here are some ways to think about it.
Rarely to Never
For smaller companies that do not plan to seek capital infusions or sell their businesses at some point down the road, it may be possible to avoid going through the valuation process altogether. Granted, this seems like an unlikely scenario, but there are entrepreneurs who are quite territorial when it comes to their hard won creations, so this certainly could happen. Of course, even if a company does not intend to engage in any large scale investments or transactions, it could end up being helpful to determine a company’s valuation for strategic planning purposes and driving up profitability. As a result, learning the business’s valuation one time or perhaps every five to ten years may prove worthwhile.
There are plenty of companies that engage in high volume investing, seek financing and capital on a regular basis, or participate in other types of activities that necessitate the occasional valuation. In these instances, the analysis could be conducted as needed, annually, or perhaps every two years. More than likely, obtaining an occasional valuation is probably sufficient for most companies. In the past, a valuation probably had a fairly decent shelf life, but now that things change so rapidly, this is not really the case anymore. As a result, most valuations are likely only accurate or valid for a year or less.
Performing a business valuation on a frequent basis is probably more common for rather large companies engaging in super high stakes activities and transactions. Of course, if this is the case, these companies are likely seeking the valuations of other firms more than they are assessing their own valuation. For awhile, there were a lot of startups soaring to success in a short time, with their estimated valuations changing quite drastically in a short time, but these cases tend to be the exception rather than the rule.