Why Business Owners Need to Know The Value of Their Business Today?

1) Transaction Support (for buyers and sellers)
2) Buy-Sell agreements
3) Divorce
4) SBA Financing
5) Employee Stock Ownership Plan (initial, recurring)
6) Assessment of Damages
7) Estate and Gift Tax
7) Bankruptcy and Reorganizations
7) FAS 157 Fair Value Reporting
8) Other

Business owners often overlook a valuation as a strategic tool to maximize the value for their business. The time to get a valuation is not immediately prior to a sale, but on the first day of ownership. When a business owner considers valuation in the management of a business, the business will likely be more valuable and sell faster when the time comes. Some businesses will take several months or even years to maximize value.

The value of your business is determined by what a buyer will pay. Different types of buyers will pay different amounts for a business. An industry insider will pay little or nothing for goodwill. The industry insider will pay book value or liquidation value which tends to be a lower price than what a financial buyer would pay. A financial buyer generally buys a Main Street business with a sales price of less than $2,000,000. These types of buyers will be concerned with discretionary earnings, cost to replace and debt capacity. Buyers seeking businesses above a sales price of $2,000,000 are considered corporate buyers that will rely on more sophisticated valuation techniques. They will employ excess earnings, discounted earnings, capitalization of earnings and multiples of earnings before interest and taxes (EBIT).

Valuations are mathematical calculations that arrive at a price, but the challenge is in the details. Figuring out what assets and liabilities to include in the valuation, choosing a standard of measuring their value, and then actually determining what each asset and liability is worth. For example, many business balance sheets may not include the most important business assets such as internally developed products and proprietary ways of doing business. If the business owner didn’t pay for them, they don’t get recorded on the balance sheet. Businesses without its special products or services that make it unique become a less valuable opportunity for a buyer. Business owners must be aware of this fact and structure the business to make it easy for buyers to see the true value of the business.

As you work tirelessly to meet the everyday challenges of running your own business, you may feel like you’re wasting your time reading an article on valuing your business. You’re not; if you fail to structure your business for maximum value, you will surely sell your business for less money. You may not even be able to sell your business if the value isn’t apparent to picky buyers. The U.S. Department of Commerce estimates that 3.6 million businesses are offered for sale every year, but only 250,000 are sold. Don’t be the 90% of business owners that never sell their business. Know what your business is worth and start increasing its value today.