Business owners often have a majority of their personal net worth tied up in the business. However, many owners are unsure how much their greatest asset is really worth, putting them at a disadvantage in making decisions that range from estate planning to deciding when to sell the business.
A common misconception about business valuations is that they are only necessary when the owner is leaving or in situations where it’s legally mandated, like giving closely held stock or forming an employee ownership plan. This misconception could leave owners lacking crucial data that should inform their actions throughout the business cycle.
Critical Data for Business Decisions
There are a number of critical points when a credible, unbiased, professional business valuation can help you make the right decisions for the next stage of the business cycle. Even a relatively new business benefits from knowing how much the company is worth. This information can help when establishing a buy-sell agreement or qualifying for bank financing, for example.
As companies mature, business valuations help guide owners as they develop strategies to further the long-term strength and profitability of the business and reduce the risk associated with the business that depresses the value. A clear understanding of its current value can help clarify strategic decisions, such as:
- Setting up incentive plans for key personnel, like an Employee Stock Ownership Plan (ESOP)
- Making financial arrangements for equipment and technology
- Planning for mergers and acquisitions
- Identifying growth strategies
- Evaluating appropriate exit strategies
What’s Next for You?
Owners must also consider the value of the business in relation to their personal goals. Retirement may still be many years off, but it’s important to begin thinking about an exit strategy and succession plan early. The insight a business valuation provides is invaluable when beginning this type of planning, as well as for other personal considerations that include:
- Beginning estate planning
- Determining life insurance needs
- Ensuring equitable division of assets in the dissolution of a marriage or even in the case of a partnership
- Setting financial goals for an eventual transition out of the business
Once the goal of retirement draws closer, owners have a new set of questions that require a reliable basis and understanding of their company’s worth. Can you afford to retire now? What is the optimal asking price for the company? Should you accept an offer that’s already on the table or wait until market conditions improve?
Expect the Unexpected
Most business owners face these types of questions over the business life cycle. They’re somewhat predictable, but life doesn’t always go according to plan. A golden opportunity — or an unanticipated divorce or major health event — that befalls an owner or family member sometimes means a sudden exit from the business. When the unexpected happens, knowing the value of your business can make a difficult choice a little easier, so it’s wise to perform a business valuation at regular intervals — even when you’re not facing an urgent need. How often do you review your 401(k) statements or pay attention to significant changes in the market? Answer, probably often, or at least should be. That same logic in understanding should lead business owners to take regular ‘check ups’ of their businesses value as it likely is a significant part of their retirement strategy.
Taking the Next Step
Making financial decisions isn’t easy, but they’re far less stressful when you’re armed with critical information. Before you take the next big step, make sure you understand the value of your business. Contact the valuation team at CRI for help determining whether your company would benefit from a valuation.
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