value

Most business owners don’t do the math on their most valuable asset.

Many small company owners don’t know what their enterprise is worth, a practice that can amount to risky business.

A whopping 98% of small businesses polled over the past two years didn’t know the value of their companies. This is especially troubling, given that for most business owners, their company is their most valuable asset. 

People whose home is their primary asset want to know what it is worth. If you open up a brokerage account, you want to know how much it’s worth. You’d never give your money to a financial advisor who told you to trust them while they invest it and never report back to you on what it’s worth. Just because your business is not liquid wealth, doesn’t mean it’s not real wealth.

Valuation is critical to running a business, and selling it

Many business owners may be too overwhelmed with day-to-day operations to focus on having their company valued. Others don’t want to spend the money or simply don’t realize the importance of having an objective third-party measure of its worth. 

A valuation, however, can be critical for many reasons. These include an impending sale, the issuance of stock options, succession planning, tax and estate planning, capital raising, implementing a buy-sell agreement, insurance needs or to obtain business funding.

If you want to gift company shares to a family member. Understanding the company’s valuation is important for tax and estate-planning purposes. Another reason to value the business is as a checkpoint so partners are all on the same page. Even if there’s a buy-sell agreement, there can be disputes over how a business is valued for the purposes of separation. Having realistic expectations for the business along the way can prevent a prolonged and messy fight over the company’s worth if the time does come for owners to part ways.

Knowing your business’s up-to-date worth is also important because many owners don’t plan to sell their business until a suitor comes knocking. If you don’t have a current valuation, you’ll be at a disadvantage from a negotiation standpoint. You could either have an overly rosy outlook for your business, or conversely, be grossly underestimating its potential. 

The cost of calculating a valuation can vary. 

There’s no single answer to the question of cost because it depends largely on the size and complexity of the business, the scope of work required, and the purpose and intended use of the valuation.

An appraisal could cost anywhere from around $5,000 to around $25,000. Some of the assumptions that go into a valuation for estate planning purposes or issuance of equity compensation could be decidedly different than for raising capital or selling a business as, “One size does not fit all.”

Business owners should update this asset value regularly.

Depending on what you need the valuation for, it can be something you do annually or every few years.  It can also be done more frequently as you are trying to grow your business. We offer a free platform that allows businesses to model how different outcomes would impact their valuation. It’s not an accredited valuation, but the service offers a baseline before you take that next step.

Valuing the business regularly can help you determine weak spots and make improvements. If you go through the valuation process and the value isn’t quite where you want it to be, you can improve the valuation based on the areas identified. It’s also helpful for general planning purposes.

For your free platform, reach out to John @ 262-282-1285