The Reflection of Valuation

The Reflection of Valuation

Decisions. Decisions. Decisions.

SMBs make decisions every day. It could be a big decision to diversify their revenue streams and take on a job they’ve never done before. Or it could be as small as changing a specific supplier. No matter how small or insignificant a decision might seem in the moment, every single decision that a business owner makes will have an impact on where the business goes next.

What does this have to do with the valuation of a business? Well, much more than you would think. 

To simplify it: a business’ valuation is a reflection of the business in its current form. While small decisions made over the years may seem insignificant at the time, they each play a part when considering the total health—and value—of that business. At its core, the value of a business is the ultimate manifestation of the decisions that have been made until that point, which are then contextualized with outside data (i.e. rates and industry factors) to provide an idea of value for a business. The decisions a business owner makes—whether good or bad—will be reflected in that valuation number.

This concept of reflection is true in our personal lives, too. When we look in the mirror or step on the scale, we get feedback via our reflection that’s a result of our health decisions. Even if we don’t notice it day-to-day, we are changing (whether positively or negatively) based on the decisions we make. Of course, repeating negative decisions like eating takeout seven days a week and not exercising will eventually (and obviously) reflect negatively on the scale or in the mirror - but we typically monitor our progress—paying attention to our reflection—and make positive changes long before it has a significant impact.

Business owners need to think of the business’ health in the same way. Business valuation is like a mirror for a business owner: a reflection of the decisions they have made, and an indicator of business health. Knowing what the reflection looked like five years ago—when a specific event may have warranted a business valuation—won’t help assess the impact of any recent decisions or changes to the business. A constant look in the mirror—at the health and value of the business—will ensure that business owners are building value and focusing energy in the right places to develop an even healthier reflection.