What Is Business Valuation and Why Does it Matter?

A business valuation isn’t just about determining how much your company is worth—it’s a powerful tool that can help you build long-term value and drive strategic growth. Whether you're planning to sell, attract investors, or simply improve your financial standing, understanding your business’s valuation can unlock key opportunities for improvement. What are some of the key factors that are used in valuations? And are used by buyers and sellers of companies to value their businesses? 1. Revenue and Sales Growth: specifically, what do you expect them to be going forward. 2. Cost of Goods Sold and Operating Expenses: of course, used to calculate profitability and a major part of cash flow. 3. Cash Flow: a. Positive cash flow ensures that a business can sustain operations and reinvest for growth. b. Free Cash Flow (FCF) is especially important in valuation models like Discounted Cash Flow (DCF). 4. Capital Expenditures: critical to free cash flow calculations that drive DCF valuations 5. Discount Rate or WACC – Weighted Average Cost of Capital: The rate used to discount future cash flows to present value. Also incorporates the required return for investors, based on the company's cost of equity and cost of debt. 6. Industry and Company Risk: These are subjective rates chosen by the analyst and feed into the discount rate and cost of capital. 7. Strategic and management plan: These plans are used by analysts to support their decisions regarding future growth rates, company risk, and confidence in company management. The key point is that business valuation isn't just a number—it’s a roadmap to increasing business value. Each of these factors is, to some extent, controlled by the business itself. So understanding how they drive valuations will enable you to gain insights into where you need to focus to improve your valuation…and at the same time make your business more successful. Stay tuned as we drive down on these factors and how you can impact them to increase your company’s value. Interested in more information, please contact GW Legacy Advisors serving Sioux Falls, Rapid City, Omaha, Fargo and the surrounding great plains region. www.gw-legacy.com #businessconsulting #businessconsultants #businessvaluation #estatevaluation #mergersandacquisitions #corporatevaluation

A Key Variable in a Discounted Cash Flow (DCF) Valuation, a valuation method very commonly used by buyers and sellers of companies, is Free Cash Flow. Free Cash Flow (FCF): represents the cash generated by the business after operating expenses and capital expenditures. Free cash flow is calculated most simply by taking operating cash flow and subtracting out capital expenditures. Operating cash flows is calculated pretty simply in the following way: Revenues - Cost of Goods Sold = Gross Profit - Operating Expenses = Operating Cash Flows As a business owner then, when looking at your valuation you need to look at revenues, cost of goods sold and operating expenses very carefully. Every business is different but if you carefully value your business and track its value over time the trends will point you to where you need to look to make changes. For a simple example if your gross profit percentage is dropping over time…it will affect your valuation negatively. As such you may want to examine your cost of goods sold…your suppliers and see where you can cut those costs to keep your gross profit margins up. We can help with that! Interested in more information or a quick consultation, please contact GW Legacy Advisors serving Sioux Falls, Rapid City, Omaha, Fargo, Des Moines and the surrounding great plains region. www.gw-legacy.com #businessconsulting #businessconsultants #businessvaluation #estatevaluation #mergersandacquisitions #corporatevaluation

This post is a little longer than usual but well worth the time! Another Key Variable in a Discounted Cash Flow (DCF) Valuation, a valuation method very commonly used by buyers and sellers of companies, is your discount rate, commonly represented by your weighted average cost of capital. The discount rate reflects the risk and expected return of investing in a business. In a Discounted Cash Flow (DCF) valuation, it’s used to calculate how much future cash flows are worth in today’s dollars. • A higher discount rate means more risk or a higher required return—so future cash is worth less today, resulting in a lower valuation. • A lower discount rate means less risk or a lower required return—so future cash is worth more today, leading to a higher valuation. In short: Higher discount rate = lower value Lower discount rate = higher value So how do you lower your discount rate? 1. Improve Capital Structure (Lower Debt Cost & Risk) 2. Increase Business Stability and Predictability 3. Strengthen the Company’s Credit Rating 4. Reduce Company-Specific Risk 5. Increase Transparency and Investor Confidence Want to know how to do those things? Stay tuned for our next post. Interested in more information or a quick consultation, please contact GW Legacy Advisors serving Sioux Falls, Rapid City, Omaha, Fargo, Des Moines and the surrounding great plains region. www.gw-legacy.com #businessconsulting #businessconsultants #businessvaluation #estatevaluation #mergersandacquisitions #corporatevaluation

Banks and SBA 7a Lenders, ensure smooth SBA 7(a) loan approvals with accurate, cost-effective, and timely SBA-compliant business valuations from GW-Legacy Advisors. Our expert team delivers independent, third-party valuations that meet SBA requirements, helping you: Accelerate loan processing Reduce risk with reliable business valuations Ensure compliance with SBA standards Interested in more information, please contact GW Legacy Advisors serving Sioux Falls, Rapid City, Omaha, Fargo and the surrounding great plains region. www-gw-legacy.com

If you're applying for an SBA 7(a) loan to acquire a business, a business valuation is a crucial step in the process. The SBA requires an independent, third-party valuation when the loan amount exceeds $250,000 or if there's a change of ownership between related parties. A proper valuation ensures: • The purchase price is justified based on the business’s financials. • Lenders mitigate risk by confirming the business’s true worth. • Buyers avoid overpaying and make informed investment decisions. By securing a professional valuation, you increase transparency, build lender confidence, and streamline the loan approval process. Interested in more information, please contact GW Legacy Advisors serving Sioux Falls, Rapid City, Omaha, Fargo and the surrounding great plains region. www-gw-legacy.com

A business valuation is a powerful tool that goes beyond determining a company's worth—it serves as a strategic guide for managing and growing a business. By understanding the financial health, market position, and key value drivers, business owners can make informed decisions on expansion, investment, and operational improvements. A valuation also helps identify strengths and weaknesses, allowing for proactive risk management and enhanced financial planning. Whether preparing for a sale, seeking investors, or improving efficiency, a clear valuation provides a roadmap for sustainable growth and long-term success.

The same company can have different values. Strange but true. It depends on what the valuation is for. Here are three examples: fair market value; fair value, and ;strategic value. Fair Market Value: The standard of value required for tax reporting purposes. This standard tends to result in the lowest of the three methods. It assumes a hypothetical buyer and seller. Discounts for lack of marketability, and minority interests are taken. Fair value: The standard typically used in shareholder disputes and marital dissolutions. It is the intrinsic value being exchanged. It does not assume a hypothetical buyer and discounts are not taken. Strategic value: This assumes the buyer is an existing company which will realized strategic benefits by acquiring the target. Customer base, work force, technology etc. It tends to result in the highest of the three. It is appropriate in the context of an acquisition. Interested in more information, please contact GW-Legacy serving Sioux Falls and the surrounding great plains region

An estate valuation is crucial when setting up an estate trust, as it ensures accurate asset distribution, tax efficiency, and long-term financial planning. By determining the true market value of all assets, including real estate, businesses, investments, and personal property, an estate valuation helps prevent disputes among beneficiaries and ensures a fair division of wealth. It also plays a vital role in minimizing estate taxes and complying with legal requirements, ultimately protecting the financial interests of heirs. Additionally, a precise valuation allows trustees to manage assets effectively and align the trust with the grantor’s intentions. With a comprehensive estate valuation, you can create a well-structured trust that preserves wealth and provides financial security for future generations.  Interested in more information, please contact GW-Legacy serving Sioux Falls and the surrounding great plains region

Implementing an Employee Stock Ownership Plan (ESOP) requires a thorough business valuation to ensure fairness, compliance, and long-term success. A valuation determines the company’s true market value, which is essential for setting a fair share price and structuring employee ownership in a way that benefits both the business and its workforce. It also ensures compliance with IRS and Department of Labor regulations, reducing legal and financial risks. Additionally, a valuation helps business owners understand the financial impact of transitioning ownership, plan for liquidity needs, and maintain company stability. By establishing a clear and accurate valuation, businesses can create a sustainable ESOP that motivates employees, enhances company culture, and drives future growth. Interested in more information, please contact GW-Legacy serving Sioux Falls and the surrounding great plains region