A key benefit of the big data revolution and artificial intelligence (AI) is that it is helping level the playing field between small and large companies. For example, growth businesses have historically been at a disadvantage compared to resource-rich incumbents when it comes to assessing their worth. Obtaining regular valuations was perceived to be a costly, time consuming, and invasive process. Business owners very rarely performed them and lending institutions never properly looked at them when assessing credit. But business valuation is being democratised by advances in technology – enabling entrepreneurs to get accurate information to inform their decision-making without having to endure many of the traditional costs.
Big data is driving democratisation
More than 30 million small business in the US employ just under half the country’s private workforce – or 58.9 million people – according to the latest figures by the US Small Business Administration (SBA). But in the decade since the financial crisis, many of these businesses have struggled to obtain the funding they need to grow and thrive. It is estimated that around two-thirds of businesses are under-financed. Banks continue to be risk averse, especially the smaller community banks traditionally relied upon to lend to SMEs.
Over the past few years, a wave of financial institutions has embraced new technologies in an attempt to deliver a sweeping democratisation of finance. These include, for example, the use of peer-to-peer and direct lending to bypass traditional intermediaries and the use of big data and machine learning algorithms to provide highly personalised services to retail customers. One of the chief advantages of big data is that it can be used to empower businesses, of any size, with knowledge. In particular, accurate insight into the value of a business can be hugely powerful information in the hands of its owners.
The benefits of getting valued
There are situations in which the need to obtain a reliable business valuation is essential. For example, when preparing to get the best possible price from a sale, or when securing financing to grow. Additionally, the benefits of valuation as a ‘health check’ – to identify and build upon strengths and help mitigate weaknesses – is often under-appreciated.
An accurate business valuation can shine a spotlight onto how a business earns its revenues – for example, the depth of its client relationships and the diversity of its client base. It can do so in the following three ways:
- Provide sometimes unexpected insights into which areas of the business are driving value, and which are not performing to their potential.
- Identify areas where to reduce operating costs, and productivity bolstered.
- Helps business owners develop an appropriate debt structure and understand how much debt to take on, so as not to overleverage their companies or underestimate its funding needs.
In short, better knowledge results in less uncertainty – reducing a business’s risk profile and helping find new ways to create value.
Traditional valuation approaches are being overhauled
In order to be credible and objective, business valuations need to be conducted by a reliable third party with a strong track record. In the pre-big data world, there were few options other than selecting an appraisal service that would typically require several weeks – or months, in many cases – to manually assess all the facets of the business. The average offline business valuation in the US costs around $8,000. While the largest companies have the resources to bear these costs, it is perhaps unsurprising that a large majority of small business do not know what they’re worth. This, the SBA has said, is one of the most important challenges these businesses and their owners face.
Today’s business owners have a compelling alternative. Technological solutions are able to coalesce and scrutinise both publicly and privately available data, to produce an accurate valuation in real-time, at a fraction of the traditional cost. They can, for example, chart how a business’s value has changed over time, show how it is performing compared to its broader industry group, and provide in-depth analyses and explanations of key performance indicators. What management-consulting firms like McKinsey would deliver to the Global 1000 in terms of key performance indicator (KPI) analysis can now be done for the Global 100 million.
At BizEquity, our view is that democratisation of this kind can help invigorate small businesses across the globe, and erode some of the long-standing barriers they have faced to achieving their potential. We believe there needs to be a new fair and open lending act and data infrastructure established for small and midsize businesses. We need to encourage commercial lenders to recognise the value of the data we now have access to, in order to more fully reflect SMEs’ capacity for growth in their lending decisions and provide credit based on the value of the private business and the shares owned by the business owner.
BizEquity is the world’s leading provider of business valuation knowledge and big data. BizEquity has valued over 33 million private businesses and distributes its patented cloud-based service through thousands of financial advisors to help better inform small businesses of their lending; insurance; and wealth management needs and potential. BizEquity is headquartered in Wayne, Pennsylvania but has offices around the world in key markets such as London; Singapore; and Delhi.
Some noteworthy accomplishments for the company include BizEquity being named one of the top 360 private companies by Entrepreneur Media; and BizEquity winning the FinTech growth and innovation award from Bank Director.