The Value Behind Small Business Valuations

Eric May

By Eric May | May 4, 2016

The vast majority of small business owners have no idea of the true value of their business. I’ve spoken with business owners who admit that, even though the corporate bylaws require a new valuation every year, they’ve never undertaken a valuation of their business. That is a huge mistake, because without an accurate sense of the value of the small business, business owners are stumbling blindly when it comes to decisions about investing in the business, insuring it, selling it, or relying on it as a personal asset for wealth-building or retirement.

There are three big problems with the traditional approach to business valuation. First, it takes a long time to do, often on the order of four weeks or more. Second, it’s expensive. Finally, and perhaps most importantly, it’s intrusive, with the valuator combing through your books and questioning your accountants. Then, after a month of research, the valuator comes back and gives you a number.

Penn Mutual and my company, BizEquity, are in the midst of a pilot program to change that, using an on-line tool that enables business owners to get a comprehensive business valuation quickly.

Helping Business Owners Find Millions in Hidden Value

Getting an accurate sense of what the business is worth is essential to the owners of small businesses. Some of the stories that people have shared with us over the course of the Penn Mutual pilot program demonstrate exactly how important this can be.

One advisor was working with a client that was looking to sell a business. A year ago, a broker had told the client the company was worth over $1 million. The client thought the number was low and didn’t sell, but didn’t have any way of disputing the number. Using BizEquity, the advisor determined the valuation was actually higher, and the client ended up selling the company for much more than what the original broker estimated. When the buyer did his own due diligence on the company, his accountant came up with the exact same number.

Having an accurate valuation of this business was transformative for both the client and the advisor. The client sold his company, clearing more than he would have been offered a year ago, and, because the client now truly understood how much he was worth, the advisor was able to address his life insurance needs.

Another story involved multiple partners who owned a small business and the partners could not agree on what it was worth. There was also another part of the firm, which some of the partners thought was worthless. A Penn Mutual advisor worked with their accountant to help the partners value both parts of the business using the online tool. This gave them an accurate number on the firm, which was frankly higher than they originally thought. Moreover, the “worthless” part of the firm turned out to be worth more than the partners thought. Again, because of this accurate valuation, the advisor was able to provide the right insurance protection for the partners and their children — who were being groomed to take over the business.

The Risks of Inaccurate Business Valuations

There are several big risks to not having an accurate valuation of your business. First, and most importantly, you run the risk of not being fully protected if something were to happen to you. You don’t have an accurate guideline of how much insurance you might need if something were to happen to you.

If you have a partner, and you don’t know the real value of the company, you are in double jeopardy. If you’ve undervalued your firm, you or your family won’t get as much money when it comes time to sell the company. On the flip side, if you’ve overvalued the firm, you could be overpaying if you try to buy your partner out. The biggest risks revolve around succession and exit planning. Selling your company for far less than what it’s really worth will affect your retirement and your family.

Timing is another important consideration. You don’t want to be going through a business valuation when someone has just passed away or a dissolving partnership. This is one of those things that you want to have planned ahead of time, because it is likely to be most needed during a time of personal or professional crisis.

No Business is Too Small

Small business owners tend to undervalue their business. All small businesses are run to be tax-efficient, as the owners work with their accountants to show the lowest amount of income possible to minimize what they owe in taxes.

I think this is one of the primary reasons that small business owners end up being under-insured. Not only have they not gone through the process of determining an accurate value for their business, they look at their tax form at the end of the year and think the numbers (which have been optimized to be as small as possible) are an accurate representation of the true earning power of their business.

Determining an accurate business value is something that every small business owner should do, no matter what the size of the business. Your business is probably worth more than you think. If you are interested in having your own business valued as part of the pilot program, go to pennmutual.bizequity.com.

This blog post is for informational purposes only. Individual results will vary and may be more or less positive than the examples discussed. The views expressed are those of the author, Eric May, and do not necessarily reflect the views of Penn Mutual or any of its affiliates. Any valuations by Biz Equity are informational only and not certified by Penn Mutual for any tax or legal purpose. The information provided by Biz Equity is neither verified for accuracy nor endorsed in any way by the Penn Mutual or Hornor, Townsend and Kent, Inc. (’HTK’. ) Biz Equity has independently provided the data that is contained in the final evaluation. The information provided by Biz Equity does not constitute a replacement for any paperwork required during the course of an insurance sale. All data must be entered by the Business Owner or a designated Business Representative. Biz Equity is unaffiliated with Penn Mutual and HTK.

2 Comments

  • Avatar Larry Kiser says:

    Is there a way for us to see this step by step valuation, allowing us to move thru each of the screens before we suggest one of our business clients does so? I’d like to see the guts of this beforehand.

    I would also be extremely interested in a specific marketing program geared towards this concept alone. Any thing like that exist?

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