Business owners commonly ask themselves, “What is my business worth?” In a perfect world, they would already know. In truth, it’s a complex answer to a relatively simple question.
In the next dozen years, approximately 250,000 business owners in the United States will try to exit. Only 50,000 will be deemed market-ready. Of those, 30,000 will go through with the transaction, 16,000 of which will sell with concessions and 14,000 at the owner’s desired value. The success rate of these attempts is forecasted at 5 percent.
The reason? Business owners weren’t proactive and didn’t understand the importance of tracking their valuation, a financial blueprint of a business’s worth.
Valuations should be done annually. As with many tasks in business, it’s easier to maintain once initiated the first time.
Business owners need to understand is that a business valuation varies based on purpose. Different purposes will cause different values. Reasons to seek a business valuation include establishing a baseline — where am I? — or an exit strategy that includes selling the business, transitioning to another co-owner, keeping the business in the family, or during the estate-planning process. A valuation also can be a valuable, ongoing business decision tool for diversifying risk, borrowing money or planning to grow the business.
It is crucial to step outside of the business and look back at the whole picture from a third-party perspective to examine how the value of the business will affect the rest of the business owner’s life. Many times, business owners are working in their business instead of working on their business.
The valuation process consists of determining the purpose for the valuation and standard of value; conducting a financial, economic and industry analysis; and finally, determining a valuation using the various approaches of cost, market or income before a range of values becomes apparent. In short, it’s an intimate look at the business behind the curtain — including finding the company’s weak links — and a detailed look at the books. In this case, an independent, certified valuator — not the company CPA or lawyer — should complete a valuation.
It may sound scary and a bit invasive, but there are big benefits to completing a business assessment and evaluation beyond just peace of mind and a good gauge as to where a business stands. A valuation allows business owners to assess and thereby reduce risks, align their team, enhance access to capital, achieve goals, and become more effective, controllable, predictable and sustainable when improvements are implemented to increase the value.
Like a solid business plan, a complete business assessment and evaluation is a roadmap to success. It allows business owners to know where they are and, more importantly, where they can go.
Chuck Mohler is the owner of Eagle Corporate Advisors.