The closest thing most small business owners have to a business valuation is a speculation. If that sounds like you, you are far from alone. A recent bank survey revealed that 98% of small businesses can’t put a figure on their company’s value. If the majority of your personal net worth is invested in your company (which is the case for the majority of business owners) that means your business is your most valuable asset – which makes it worthwhile to know its fair value.
Why Do The Math?
Lack of valuation information limits your awareness of the financial health and well-being of your business. It also limits your insight into critical issues, like the best financial structure for your organization and the necessary insurance to protect your liquid assets. Until entrepreneurs understand a business valuation’s importance, they run the risk of sub-optimal outcomes, particularly when it’s time to exit.
The most obvious purpose for conducting a business valuation is to prepare for a potential sale. In this instance, the valuation provides a reasonable market value so that you do not undersell and leave money on the table. Likewise, a valuation report can help you determine the best time to sell and give you more power in negotiations.
Besides helping to optimize for a profitable exit, a valuation enables you to keep perspective in the face of pressured deadlines and competing objectives. Everyday decisions must often be made swiftly with little time for preparation or serious consideration. The company’s valuation tells you objectively how your asset is seen from the outside and what its most and least important or latent value drivers are.
4 Other Reasons For A Business Valuation
1. Financing
Obtaining a commercial loan may become necessary for business expansion or emergency requirements. Before approving financing, lenders often seek an independent assessment of a business’s value and financial viability. A thorough business valuation will help your lender package and make it easier for you to get the money your business needs.
2. Growth Plan
Business owners know that a growth strategy is vital for a company’s long-term survival; growth is difficult without a sound plan. Having a thorough and accurate valuation of your business is an excellent starting point to any plan because it allows you to make informed decisions regarding your future course of action. Likewise, if expansion through acquisition is a possibility, a business valuation will help you assess whether the asking price is appropriate.
3. Buy-Sell Agreement
A buy-sell agreement could reduce the likelihood of future disputes between participants in a partnership or limited liability business.The foundation of every agreement that can be accepted by all parties is an agreed-upon value – this is what a valuation provides. A comprehensive and substantiated value inquiry ensures that in a shareholder buyout no one is under-compensated. Creating a report explaining the elements that determine the firm’s worth and the conclusion of value fosters greater transparency among partners.
4. Estate Planning
If you wish to pass on your assets, knowing the value of your company helps determine how much each family member or beneficiary would receive. Additionally, knowing the value of a firm for estate and gift tax reasons allows you to manage and minimize any potential tax ramifications of the transfer. For estate tax purposes, the value of any business interests you own at death will be included in your gross estate. Thus, a valuation provides a more precise picture of what your heirs will receive after taxes are paid.
Updating Your Valuation
A business valuation report often has a short half-life. Consequently, an annual business valuation should be a standard practice. An up-to-date business valuation will prepare you for unanticipated possibilities, expose variations in your company’s value over time, and serve as a guiding compass on how to increase your company’s value.
Ideally, a current professional valuation should exist at all times, as no one can predict when their plans may be altered or what unforeseen situations may arise. Having a business valuation on hand keeps you confident and well-prepared for the future.
Finding The Experts
Understandably, you may have put off obtaining a professional valuation because you are unsure of how or where to begin. The valuation process can be time consuming and complex; however, by working with seasoned business brokers and analysts like those at Viking, you can avoid common valuation mistakes.
Each approach to valuations has its own peculiarities, and diverse valuation types require expertise in the main business valuation methods. Professional business brokers can provide valuations based on current market conditions, which take into account the business world’s ongoing flux. If you require industry-specific information or a more accurate value of your company, our experienced team of business brokers and advisors at Viking Mergers & Acquisitions can offer no-cost valuations and initial consultations. Contact us today to request a complimentary valuation.