The Benefits of an Annual Business Valuation

When you hear “business valuation,” what comes to mind? If you’re like most people, you think about a business establishing a value or price for the owners to transition out of the business (either through a sale or through gift & estate means), to obtain financing, or to support litigation matters. However, business valuations can also be used as a benchmarking tool to quantify a business’s performance over time. In 1919, the Michigan Supreme Court ruled in Dodge v. Ford Motor Co. that a “business corporation is organized and carried on primarily for the profit of the stockholders,” namely, to create shareholder value. Based on this premise, a business owner’s or C-Suite executive’s most important responsibility to the organization is to increase the value of the business. Following logically, annual business valuations are an essential tool for tracking, guiding, and accelerating that growth, as well as assessing management’s performance.

Just as you wouldn’t manage a company without understanding its financial statements, you shouldn’t manage it without knowing its current value. A business valuation provides a baseline - a clear, objective measure of where the company stands today. When updated annually, valuations become a scorecard for performance. Many business valuations done on a Fair Market Value basis consider future projections, so integrating an annual valuation process into your year-end planning can add significant value. It allows leadership to measure performance against budget, identify potential weaknesses, such as insufficient customer or supplier diversity, and evaluate the company’s progress towards long-term goals. Regular valuations allow ownership and management to see whether their strategic initiatives are increasing the company’s enterprise value. Over time, this process creates accountability and focus. Without measurement, efforts to build value are little more than good intentions and educated guesses.

One of the most critical and often overlooked elements of valuation is using the right basis of value. This means distinguishing between Fair Market Value (FMV) and Investment Value for most purposes. Fair Market Value, the most common standard of value used in business valuations for compliance, tax, and transaction purposes, represents what a hypothetical buyer and seller would agree upon in an open and unrestricted market, with neither under compulsion to act and both having reasonable knowledge of the relevant facts. Conversely, Investment Value reflects the value to a particular investor, considering their unique strategies, synergies, and expectations. In many cases, Investment Value is higher than Fair Market Value because confident investors are more likely to pay a premium for an opportunity they can uniquely enhance. Understanding which standard of value applies to your business ensures that the valuation aligns with your objectives, whether you’re estate planning, evaluating management, strategic decision-making, or preparing for a sale. Setting a value for your business that’s too high can inflate expectations unrealistically, particularly when negotiating in a Fair Market Value transaction.

Furthermore, an effective valuation doesn’t just tell you what your business is worth; it also helps you understand why and what levers can be pulled to increase its value. Annual valuations provide insights into the value drivers within your organization, such as revenue growth, profit margins, customer concentration, leadership depth, operational efficiency, and more, and they highlight how those factors change year over year. By reviewing these drivers over time, you can determine which levers are most influential, which areas are performing well, and which areas present the best opportunities for improvement. For example, if cash flow growth and customer diversification consistently improve, those initiatives can be reinforced. If working capital or margin performance lags similar companies in your industry, management has clear areas to target. In this way, your annual valuation becomes more than a report, but instead a strategic roadmap for sustained value creation.

Here are some additional, broader benefits of an annual business valuation.

• Strategic Planning - valuations provide data-backed insights into whether management’s long-term goals are being achieved, and they guide resource allocation toward initiatives that produce measurable value.
• Stakeholder Alignment - a consistent valuation process promotes transparency among shareholders, partners, and key executives. Everyone operates from the same set of facts, reducing uncertainty and helping ensure that expectations are aligned.
• Risk Management and Preparedness - regular valuations ensure that owners are always “transaction-ready”, whether preparing for a sale, a merger, an unexpected offer, or unforeseen circumstances such as health or leadership changes. They also ensure that owners maintain a realistic expectation of what their ownership interest is worth, preventing over- or underestimation in transition scenarios.
• Financing and Investor Confidence - lenders and investors view businesses with current, professionally supported valuations as more credible and disciplined. That confidence often translates into better financing terms, enhanced investor trust, and stronger negotiating leverage in future transactions.

Not all valuation firms are created equal. Selecting the right partner can make the difference between a report that simply provides a number and one that delivers actionable insight. Consider the following in your search:

• Expertise and Credentials - look for professionals with relevant designations (CVA, CPA/ABV, CFA, ASA) and experience in your industry.
• Objectivity - independence and transparency are critical to ensuring credibility.
• Methodology and Basis of Value - your selected firm should clearly explain its valuation approach and apply the correct basis (FMV vs. Investment Value) for your needs.
• Strategic Mindset - the best advisors interpret the results and help identify paths to improvement, not just deliver a report.
• Long-Term Relationship - ongoing engagement with the same firm builds continuity and allows for meaningful year-over-year comparisons.

A well-run business continually seeks to improve, and improvement must be measured. As statistician Karl Pearson famously quoted, “That which is measured improves. That which is measured and reported improves exponentially.” An annual business valuation provides a framework for measuring your business’s performance, establishing a baseline and identifying the levers that move the needle and increase value. Ultimately, building enterprise value is the most important job of any business leader, and regular valuations transform that goal from an abstract concept into a tangible, trackable discipline.

Breneman Advisors partners with business owners and executives to go beyond the numbers, delivering insight, clarity, and strategies to grow long-term value. Contact our experienced, credentialed team today to get started!