Why Your Business Needs Both a Valuation and an Evaluation

What is my company worth, and why? It’s a common question all business owners ask. And it usually means you’re ready for a valuation. Sometimes, however, owners really need something slightly different. They want to know what the business is worth today and how they can grow that value over the next few years. This is where a business evaluation can help. Instead of stopping at a value, an evaluation assesses performance, risk, and value drivers to identify where the company can improve. 

This article walks through both ideas in plain language. You will see how valuation and evaluation work together, when you need each, and how the right mix gives you a more straightforward path to a stronger business.   

What Is a Business Valuation?

Let’s take a quick look at what a business valuation is and when it really matters. 

What A Business Valuation Is

A business valuation is a structured way to answer a simple question. What is this company worth today? It is not a guess or a back-of-the-napkin estimate. A formal valuation uses accepted methods and a straightforward process to estimate the economic value of your company or a specific ownership stake. 

How a Valuation Works

Advisors usually rely on three broad approaches.

• 
  An income approach looks at cash flow and the risk of achieving it.
• A market approach compares your company to recent sales of similar businesses.
• An asset-based approach focuses on what the company owns and what it owes.

Different methods may carry more weight depending on your industry, size, and valuation purpose. 

When You Need a Valuation

Every valuation is tied to a specific purpose and an effective date. You might need a valuation for a pending sale, a partner buyout, a gift or estate plan, a divorce, or an employee stock ownership plan. 

In each case, the standard of value and the primary assumption should match the reason you are doing the work. That is what gives the value weight with buyers, courts, lenders, or the IRS.

What You Get with a Valuation

A valuation gives you more than a number. You should receive a formal report that explains the methods used, the data used in the model, and the reasoning behind the value conclusion. You can also see how revenue trends, margins, customer mix, and risk factors influence that number. 

For many business owners, this becomes a baseline. It is a starting point before you focus on the changes that can grow value over time.   

What Is a Business Evaluation, And How Is It Different From a Valuation?

Now that we know what a valuation is, we can look at business evaluations and how they can help business owners. 

What Is a Business Evaluation

A business evaluation looks at how your company is performing. It is a structured review of financial health, competitive position, and day-to-day operations. 

Rather than aiming for a single value on a specific date, an evaluation focuses on strengths, gaps, and future potential. Many tools on the market describe this as a business health check or business assessment and use it to highlight where owners can improve results before a sale or significant change. 

In simple terms, a valuation answers what your company is worth. An evaluation leans toward how it is working today and what needs attention. 

How an Evaluation Works

Most evaluations start with data. Advisors review financial statements, customer information, and key performance indicators (KPIs). They also look at trends in revenue, margins, cash flow, and concentration risk. 

From that, an evaluation usually moves into a broader health check. That can include questions about leadership, processes, staffing, technology, and competitive position. Many firms use structured questionnaires, value driver assessments, or business health-check templates to maintain consistency across reviews. 

Some evaluations are built around exit readiness. These focus on what a buyer will see in diligence and where a buyer might discount the price because of risk. Owners receive scores or ratings across areas such as financial reporting, customer base, contracts, and founder dependency. 

Compared to valuations, an evaluation blends numbers with practical judgment about how the business runs. Both use data, but only one is designed to guide day-to-day improvements. 

When you need an Evaluation

Evaluations are helpful when the main goal is better performance or a smoother future exit. If you are three to five years from a sale and want to grow value before going to market, a detailed health check can show you where to focus. 

Evaluations are also helpful when profits are flat or slipping, and the cause is not apparent. Reviews of cash flow, expenses, and operations can uncover pricing issues, weak processes, or poor-fit customers that do not show up in basic reporting. 

In short, you need an evaluation when you want direction. You need a valuation when you want a number that others will accept and rely on. 

What You Get with an Evaluation

A good business evaluation leaves you with more than a score. You get a clear summary of strengths, weaknesses, and value drivers that deserve attention. Many exit-readiness and value-driver frameworks turn this into a short list of focus areas rather than a thick report that sits on a shelf. 

Some services go further and outline a step-by-step plan to improve results. That might include actions such as cleaning up financial reporting, diversifying customers, firming up contracts, or shifting owners out of day-to-day bottlenecks. 

Business evaluations often complement a formal valuation. The valuation sets the baseline, and the evaluation shows you have to move the line.

How Valuation And Evaluation Work Together

A valuation and a business evaluation do different jobs, but work best side by side. A formal valuation sets a clear baseline for value. It pulls your numbers, risk profile, and market context into a single conclusion. That gives you a starting point before you make changes. 

An evaluation then analyzes that picture. It assesses earnings quality, customer mix, operations, and leadership, and turns the findings into a short list of priorities. Instead of a thick report, you get a practical plan. 

Over time, you can repeat the loop. Begin with a valuation. Use an evaluation to guide improvements. Come back to valuation later and see how far you have moved the needle.

Choosing the Right Next Step

Knowing the difference between a valuation and a business evaluation gives you more control over what happens next in your business. 

If you are not sure which to do first, it might be time to talk with an advisor. The right partner will listen to your goals, help you decide whether you need a number, a roadmap, or both, and keep the focus on building a stronger company over time. 

Ready to get a clear understanding of your business value and next steps? Contact SHG to discuss a valuation, evaluation, and a plan that fits your goals.