For most business owners, their company is their most valuable single asset. So why is it that we tend to know the value of our stock portfolios, our homes and even our cars but don’t have a clear realistic understanding about the value of our business? Doesn’t it make sense to know the value of something that makes up such a large portion of a business owner’s financial portfolio?
There are obvious situations in which business owners must have their businesses valued. This could include gifting of shares, estate planning, partnership buyouts or disputes, divorce and others. You might question, if none of the above apply to me, why is it important for me to obtain a business valuation?
Business Sale Timing: It would be very difficult, in fact nearly impossible, to determine the viability of selling your business without knowing its value. When considering the option of selling a business, a business valuation enables you to better understand the realistic value of your company to confirm in advance if it would enable you to achieve your financial goals. A business valuation is a tool that allows the owner to accurately assess and make an informed decision about the viability and timing of selling their business. Combining the value of your business with that of your financial position outside of your business, will enable you to determine if you can comfortably afford to sell your business to pursue other endeavors. Even if you are not ready to sell, it is nice to know your options.
Increase the value of your business: In conducting a business valuation, a valuation firm identifies the key value drivers that increase value as well as the operational risk factors that detract from value. Knowledge of these risks that negatively impact value will enable you to pro-actively take actions to improve and mitigate these factors. This advanced planning significantly improves marketability and positions the company to achieve a more favorable value when the time is right to sell. These initiatives can take time to implement so early awareness is important.
Partnership/Shareholder Matters: Most companies have more than one owner. Every partnership should have a Buy/Sell Agreement. Buy/Sell Agreements provide direction upon certain voluntary and involuntary circumstances such as termination of employment, retirement, disability or death of one of the shareholders. The agreement establishes the value that one partner would pay another (or to their heirs in the event of death) to buy out the partner’s share of the business. Often a term life insurance policy on the lives of the shareholders is put in place to cover all or part of the cost of the buyout. A Buy/Sell Agreement without a business valuation is of little use. It is akin to having a lease option without specific lease terms.
Assess Business Performance and Improvement: The number one indicator for determining business performance is the increase or decrease in the market value of your company. This will encourage and direct you to approach your business more strategically and focus on the initiatives and impediments that if addressed, will increase the value of what is your most valuable asset.
Business valuations are very cost-effective to obtain. Once you engage in the process of obtaining a business valuation, the cost to update it is a fraction of the initial cost. It will prove to be an invaluable tool for strategic business planning and assessing the timing and viability of a future transaction. If you would like to know more about the business valuation process and how you could obtain one for your company, we would welcome hearing from you.