If you don’t feel like you have a handle on the true value of your business, then you are not alone.  Many of the business owners we work with have an idea of what it is worth, but admit that this is something they have come up with on their own and are not sure if it is a real value.  Others say they don’t know where to start when it comes to valuing their business.

So why is it important to know the value of your business?  To answer that, start by thinking back to the early days of starting your business.  It wasn’t easy and you went through that sacrifice for a reason such as providing for your family, the chance to make more income, or more freedom.  Your original reasons for starting the business are probably similar to why you still run it today.

However, you will not be able to run your business forever and knowing what it is worth gives you a starting point for how it can be used to provide for you and your family well into the future.

To bring this home, we have been working with a couple of different business owners who are in different places, but both need to know the value of their business.  The first has a retail store that was started out of an extra bedroom in his apartment but has now grown to several locations and several million dollars in sales.  He has the opportunity to continue growing the company, but has worked very hard to get the business to this point and isn’t sure he has enough left in the tank for the next run.  We worked with a professional to value his business and learned that it would sell for between $10,000,000 and $12,000,000 in the current environment.  This really wouldn’t have meant much to him without a full financial plan.  That plan showed that after paying taxes and using some of the proceeds to pay off personal debt, what would be left is enough to allow him to maintain the lifestyle he wants for his family.  So this business is now being sold to a buyer who has a great opportunity to continue the growth.

The second owner is in a different position.  They are a professional services business that was drastically hurt by the recession starting in 2008.  They had to make many changes, but came through and are now back to being profitable.  For this owner, we looked at his comprehensive financial plan and came up with a future sales price that he would need to meet his financial goals as well as the amount of income he would need if he kept the business for his children to run.  The value of the business gave us our starting point in this instance so that the business could make strategic decisions for future growth to meet the owner’s personal long term goals.

So if a valuation is so important, why don’t more businesses have it done?  Here are some of the reasons and pitfalls when it comes to valuing a business.

  • It is too expensive: That can be true if you need a very detailed valuation, there is a court proceeding, or you have many different entities. However, for most owners an Estimate of Value will provide what you need for making strategic decisions.  This provides a high level overview of the value of your business given your industry, economic environment, the marketplace where you do business, competitive landscape, etc.  The professionals we work with will likely charge between $2,500 and $5,000 for this service, which is much lower than most of our clients’ think.
  • I’ll just use Book Value: We hear this a lot and both of them are very concerning. Book Value is simply the value of the assets minus outstanding liabilities.  This is a valid value if you are shutting down the business.  However, if the business is going to continue, then it is worth more.  If you plan on using this to gift or transfer the shares to a family member, the IRS will likely challenge the value and likely win the argument, which could result in gift or estate taxes.  If you are selling to someone other than family, you are selling for less than fair market value.
  • I’ll just use a Multiple of Sales: This is also commonly heard from business owners who we meet with. While higher sales is good, the amount of sales has very little impact on the value of the business.  The bottom line is what a buyer is after.  For example, you could have a business with $10,000,000 of sales and $9,000,000 of expenses that is worth far less than a business with $5,000,000 of sales and $1,000,000 of expenses.  Where you really want to get is determining the cash flow that would be available to a new owner and use that for your multiple.
  • We’ll get to it when we get through “X”: There is always something going on with a business that will be more important in the moment than valuing your business and long term planning. Fires come up every day and need to be dealt with, but if you put off valuing your business too long, you will not know where you are going and how to make decisions to best support the reason you are in business to begin with…supporting you and your family.

If you are ready to learn the value of your business and how that impacts your personal financial goals, we are here to help.  Contact us today to meet one of our professionals with the experience and expertise to provide the answers you need.

Securities, Investment Advisory and Financial Planning Services offered through qualified registered representatives of MML Investors Services, LLC, Member SIPC, 12 Cadillac Drive, Suite 440, Brentwood, TN  37027 (615) 309-6300.  Continuum Planning Partners is not an affiliate or subsidiary of MML Investors Services, LLC or its affiliated companies.  CRN201709-195327

Continuum Planning Partners Post Author
Andy Faught, CFA®, CFP®

Talk to one of our specialists today.