When we ask business owners how much their businesses are worth, responses range from a noncommittal shrug to “I haven’t given it much thought,” to a broad, general guess.
All of these dismiss the importance of an owner knowing their business value. The wealth of nearly 70% of all small business owners is tied up in the business. And while 78% of business owners plan to fund their retirement through the sale of their business, 98% don’t know what their business is worth.
For financial advisors working with business owners, those numbers are alarming. After all, how can you give business owners sound advice about financial planning, capital structure, life insurance, exit and succession planning, or retirement without understanding the value of their largest asset?
Some advisors believe that business value is only important when owners are getting ready to retire or sell their businesses. But in reality, business owners and the professionals that serve them should always know what the business is worth.
Here are 10 reasons your business owner clients can’t afford not to know the value of their business.
1. Increased value: What can be measured, can be improved. A comprehensive business valuation provides business owners with clear direction on areas of under, over and average performance, helping to guide better strategic decisions, business development plans and long-term goals.
2. Capital infusion: Outside investors and lending institutions will evaluate the business plan, shareholders’ agreement, investment memorandum and business value before investing or loaning capital.
3. Mergers, acquisitions or share swaps: A business valuation facilitates negotiation between entities entertaining potential M&As or share swaps.
4. Dissolution of partnership or partial exit by owner: When a business partnership breaks down or partners agree to part ways, the involved parties have to find a fair and equitable way to split interests. Whether the weighting of shares changes, one partner buys the other out, or the partnership is dissolved entirely, a business valuation will facilitate the process.
5. Divorce: Business interests represent marital assets and could become part of the divorce settlement for an owner, partner or shareholder. Both spouses could approach settlement proceedings with independent business valuation reports, so historical valuations can provide critical insights.
6. Tax strategies: A current business valuation is required for estate tax settlements, to calculate capital gains tax liabilities, and for income or property tax disputes. A valuation report can also lead to tax benefits that might otherwise go unclaimed.
7. Employee incentive programs: To satisfy annual requirements for Employee Stock Ownership Plans, a business must disclose its value to its employees.
8. Insurance planning: Forty percent of small business owners have no life insurance, and of those that do, 50% are underinsured. That leaves families, partners and employees at risk.
9. Buy/sell planning: A buy/sell agreement establishes the value of ownership shares for each partner in the business. The only way to establish that value fairly is to understand what the business is worth.
10. Retirement planning: No matter how far off retirement may seem, it’s never too early to start planning for it, especially for business owners who intend to use the sale of their business to fund retirement.
Despite the importance of business valuation knowledge, it historically hasn't made practical business sense for advisors to offer valuation engagements, since the process has traditionally been tedious, time-consuming and expensive.
BizEquity’s innovative online approach to business valuations eliminates these barriers. Our technology combines the power of big data with your clients' business financials to deliver four critical estimates of value and 12 industry-specific KPI benchmarks, in far less time and at a fraction of the cost.
Click here to learn more about how BizEquity can help you guide your clients to more strategic business decisions.
