If you own a business, you probably don’t get to think much about the future. You run your business in the moment. Tomorrow will take care of itself. Or will it? Sure, you’d like to retire, or maybe transition the business to a trusted partner. But to reach these goals, you need to know what your business is worth today.
According to Penn Mutual’s recent family business survey,* business owners who haven’t had a business valuation performed view it only as an ‘end’ tool that will help them sell the business (54%) or divide the estate (39%). The fact is, most business owners don’t really know what their business is worth. Up to 75% of the world’s 200 million small businesses (30 million in the U.S.) don’t know what they’re worth.** And because of that, there’s danger in either overvaluing or undervaluing your business.
You need a regular, up-to-date business valuation to help keep you on track for reaching your goals.
Benefits of a business valuation
Some business owners hesitate to have a business valuation done because they think of it as a future need, as well as being costly and intrusive. However, getting one now can help you run your business today by:
- helping you to operate day to day
- measuring the financial health of your business
- making quick decisions on expanding or merging your business
- rewarding employees
- obtaining the right amount of general liability insurance
- getting the proper life insurance in place to fund buy-sell agreements, split-dollar plans and key person coverage
Appraisal vs. valuation
Before you get started, make sure you know the difference between a formal business appraisal and a business valuation. Appraisals are typically done for the IRS or in legal proceedings. For example, in the case of a business buyout, a dispute or a divorce, a certified business appraisal may be necessary. If you need to have an appraisal done, you’ll need an accountant or business valuation firm to help, which could be costly.
On the other hand, a financial professional can use business valuation software to provide a regular valuation at a more affordable rate. It’s wise to have this kind of valuation done regularly, as it can keep you up to date on your company’s progress over time and help you determine opportunities for the growth of your business.
Methodologies to determine business value
There are several methodologies used to determine the value of a business. The type of business you own will be a key factor in determining which method(s) is appropriate to use. For instance, are you a start-up or a mature business? Do your profits remain consistent or do they fluctuate? Is your business capital-intensive, like a restaurant, or not so much, like a consulting business? These and other factors contribute to determining the value of your business.
Effective business planning
A business valuation allows you to make effective strategic decisions and solid business planning in the areas of expanding your business, getting financing, prepping for retirement, taking care of key employees, selling or transitioning your business, or setting up buy/sell agreements. The reasons are many, but you need to take action on them. Life insurance may be a cost-effective funding vehicle to help with these strategies.
If you’d like to learn more about business valuations or to get started, reach out to one of our financial professionals.
*Penn Mutual’s 2020 Family Business Survey was conducted between July 22 and August 10, 2020. Conducted with Family Business Magazine, the survey was intended to understand the challenges, expectations and behaviors of family-owned businesses and the people who lead them. The 305 respondents included business owners, partners and other high-level family employees.
**Biz Equity https://www.bizequity.com/aboutvaluation
This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. Always consult your legal or tax professionals for specific information regarding your individual situation.