Why Do You Need a Business Valuation?

Your local assessors office has a record of what your house is worth. The popular automotive Blue Book tells you what your car is worth. Articles in Consumer Reports provide the pricing data you need to negotiate the best deals on everything from a refrigerator to a set of golf clubs. And articles in personal finance magazines counsel you on how to compare the cost of mutual funds and even where to find the best college education values. So, why is it that most small business owners in the country don’t know what their business is worth–and often don’t know how to find out?

Interestingly, we insure our homes and our cars based on their value, and even get our jewelry appraised. Yet, when it comes to valuing our small businesses, most business owners pass the buck. Across all industries, the response to the question, “Do you have a business valuation?” generally is, “No, because I’m not ready to sell”.

Yet, when you think about it, knowing what your home, your car, your investments, and even that diamond necklace are worth in advance of deciding whether to put them up for sale certainly helps you to better manage those assets and make big-picture financial decisions. For example, if your home is already valued at the high end of the houses in your neighborhood, it might not be wise to invest in a half-million-dollar renovation. Or, if you calculate that you have more than enough cash to fund your retirement, you may be ready to consider some gifting strategies.

Similarly, a business valuation can help you improve the way you manage your business. The bottom line is that while most business owners start down the valuation road only when they begin contemplating the big sale, there are many reasons why a business valuation is good business. A business valuation can help you achieve the following:

  • Strengthen your credibility. An independent, outside valuation builds everyone’s confidence, from your employees to lenders to future buyers. If you want to expand significantly by building a new facility or attracting top employees, your business valuation will help both lenders and job candidates to evaluate your business.
  • Keep employees motivated. Some incentive programs, whether they are cash- or stock-based, may be tied in some way to the growth of the business’s value. Demonstrating the company’s current value to your employees, how you will measure growth, and how their rewards will be determined will give them incentive to outperform.
  • Track your goals. Maybe you’re planning to buy a new office building, launch a new product, add staff, or expand internationally. Whatever your goals, you need a way to measure your progress and how your efforts impact the value of your business. A valuation gives you a starting point.
  • Determine when you can retire. Small business owners often have an inflated sense of the value of their company. If you are counting on income from the sale of your business to support you in retirement, the sooner you determine whether your estimate of your company’s worth is realistic, the better.
  • Expedite sales and acquisitions. Think about real estate sales in your hometown. Fairly priced properties move more quickly, right? The same is true for sales of small businesses. If you have a firm idea of what your business is worth, you are more inclined to price it attractively for interested buyers. On the flip side, you may wish to merge with or acquire another company. Having an up-to-date business valuation can allow you to move faster to take advantage of these opportunities.
  • Inform estate planning. In many cases, the value of a business represents a sizable percentage of your net worth, so working on an estate plan is impossible without an accurate valuation. A valuation is particularly important if you have children who wish to continue to be involved with your business.
  • Protect your family. If something happened to you, a business valuation could help your family deal with the potential sale or dissolution of the business. Knowing the value of your business could also be important in divorce proceedings or if you wanted to buy out a partner and bring in one of your children.

While these are all compelling reasons to seek a business valuation, it’s still easy to put it off. After all, valuing a business is much more complex than thumbing through the Blue Book to value your car.  Factors to be considered by an expert include the general economy, industry conditions, financial performance, management experience, and debt/equity ratio.

Another roadblock is that running your business takes up so much of your time. Think about that, though. The fact that your business is all-consuming is precisely why you should invest in a professional valuation. Your business is your life’s blood. And if you don’t take care of it, you may lose much of the value you’ve built.

If you have a business and are unsure about how to proceed in obtaining a business valuation, we can put you in touch with a qualified professional to prepare your business valuation.

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