Why You Need a Business Valuation
BY: Daniel M. Savage
- You'll find out whether your business is transferable. Not all businesses are transferable or saleable. An appraiser's first move will be to determine whether your business has value to a buyer, beyond the value of its tangible assets. This question arises when the business’s success and continuation are dependent on the owner, and the ability to generate enough profits to provide ROI are limited or non-existent. Most businesses can become transferable, though getting there can take planning, investment, and time.
- You'll get a realistic, supportable value conclusion allowing for meaningful planning or negotiation. Business owners often have an inflated sense of their business's value. This can happen when one considers only historical performance and applies a multiple to get a “back-of-the-envelope” result that fails to consider future changes. Privately owned businesses are dynamic – they're constantly growing, shrinking, hiring, firing, re-investing in capital expenditures, funding working capital needs. Too often, owners mistakenly assume the operation is worth the number they need it to be worth to retire.
- You'll identify the drivers of your business's value. Business valuation needs to include more than just a calculation of numbers on an income statement. There are a significant number of other qualitative factors that can result in increased (or decreased) value. Identifying and understanding these factors empowers you with the ability to implement strategies to increase value over time, before the time to sell arrives.
- You'll be able to track your largest asset and plan realistically for the future. A business is generally its owner’s largest asset, often by a lot. Realistic retirement planning depends heavily on the value assigned to the business. Just as you would not go 20 to 30 years without looking at the value of your 401(k), you should understand the current value of your business, or the value of your ownership interest in the event you have partners. Further, business valuations completed over a period of time can provide insight into whether the company's value is increasing or decreasing.
- You'll ensure that buy-sell agreements will work. If you do not own 100% of your business, a buy-sell agreement is possibly your most critical legal document. When drafted well, it will include the valuation provisions for each of the six triggering events – death, disability, resignation, termination with cause, termination without cause, and retirement – that could occur. A business valuation gives owners the opportunity to define their intent under each of these circumstances by considering the impact on value. This allows the owners to define “fair” before they know which owner or event will trigger the agreement.