For most business owners, their business is their largest asset. And you don’t want to guess at the value of your most valuable asset. Even if you aren’t thinking of selling soon, we believe owners should put in the effort to get a formal valuation of your business. Why?
- It’s likely that the wealth you have tied up in your business is going to one day fund your retirement. How can you make retirement plans if you don’t know how much wealth you have?
- Knowing the true value of your business is crucial for estate planning purposes. Without a valuation, you cannot make informed decisions regarding how to distribute your assets among heirs, establish trusts or other structures to transfer ownership, or ensure liquidity exists to pay a tax.
- A valuation is important for insurance purposes. Underinsuring could leave the business vulnerable to lawsuits or business interruptions. On the other hand, over insuring can lead to unnecessary expenses.
- How your business is valued can impact strategic planning across your whole balance sheet. Decisions about borrowing, saving, and allocating capital may not be effective in the long-term if you don’t know what decisions could add the most value over time.
How To Find Out What Your Business Is Worth
There is no single formula for valuing a business. There are several variables that can impact what your business is worth at any given point in time.
What is the state of the economy?
Your business will be worth more in good times when other businesses are looking to acquire.
What is the state of your industry and its outlook?
If your industry is performing well, you are more likely to attract more interest from investors and garner a higher valuation than a company in a struggling or shrinking industry. Be aware of growth patterns and fluctuations related to the economy.
What multiple has historically been used to value a business like yours?
Multiples vary from industry to industry. A resource like Valuation Academy can help you understand what’s been happening in your industry.
Who are the interested buyers?
Are they local in your community, based in the U.S., or a global buyer? If the potential buyer can realize synergies from acquiring your business, it’s going to be worth more.
Wondering how to sift through all of the variables?
That’s what a business appraiser is for. A business appraiser should be credentialed and experienced. Their job is to identify a price range that is reasonable depending on the variables at play when you decide to sell.
A Certified Business Appraiser (CBA) designation is thought to require the most rigorous training that an appraiser can achieve. There are other designations that require testing and hands-on experience as well. Learn more about business appraiser designations here.
The National Association of Certified Valuators and Analysts has an online directory that allows you to search for an appraiser based on industry knowledge, credentials, and location.
Like other professional fields, a good referral is an ideal approach to finding an expert that can help you. Business appraisers often work closely with financial advisors, accountants, attorneys, and insurance advisors as part of a larger team that supports a business owner’s exit strategy. Ask other professionals you work with for a referral.
There may be multiple steps in the process
You may be asked to clean up a few items as part of the valuation process. For example:
- Financial statements – income, balance sheet, and profit and loss statements, both current and at least a few years of history should be clean and presentable.
- Service contracts – who are your key vendors and customers? Potential buyers will need to review key contracts.
- Key employees – same thing here. Buyers want to understand the compensation and agreements for key employees.
- Operations procedures – how does your business run day-to-day? Documented procedures and processes that prove how your business runs are valuable to a potential buyer.
You get the idea – the more you can document what makes your business successful, the easier it will be to appraise what you’ve built.
Ready to know what your business is worth?
At Heritage Financial, many of our clients are business owners. And we’ve helped many owners better understand the value of their business so they can prepare for an eventual retirement, whether it’s 5 years or 20 years into the future. Over the years, we’ve built a network of professional advisors, including business appraisers, that are instrumental to wealth management and financial planning strategies for business owners.
Read about how we helped a recent business owner prepare for and execute the sale of his business and transition to retirement here.
If you are ready to know what your business is worth, our team of Wealth Managers can help. If you are ready to get more clarity on your business and how it fits into your overall financial plan, contact us.
