Ten reasons for business valuation
Knowing what your business is worth is important at all stages of the business lifecycle, not just when you’re preparing to sell or retire. The problem is, the traditional business valuation method was manual, time-consuming, and expensive (around $8,000).
For that reason, business owners haven’t been in the habit of obtaining valuations until absolutely necessary. But thanks to recent advances in business valuation technology, platforms like BizEquity allow business owners to gain real-time insights into the value of their business in minutes.
Here are 10 reasons business valuation is so important:
Reason No. 1: Understanding your business’s potential
Most business owners envision their business evolving and growing over time, whether that means opening new locations, expanding the team, creating new product lines, or bringing in more family members to take charge. Whatever your growth goals are, you need to start with a realistic and current understanding of what your business is worth right now.
A real-time business valuation, like the one offered through BizEquity, creates a baseline valuation that you can use when establishing goals and making strategic, forward-focused decisions.
Reason No. 2: Planning for retirement
Around 78 percent of business owners plan to fund their retirement with the sale of their business.1 The problem is, 98 percent of them don’t know what their business is worth.2
Business owners often face additional hurdles in preparing for retirement. Without an employer-sponsored retirement plan (like a 401(k)) and matching contributions, you might be less incentivized to save. Or at least, it’s something that tends to fall on the back burner when you have so many other more pressing and immediate obligations.
If you plan on using the windfall from the sale of your business to fund the majority of your retirement, you absolutely need to know what your business is worth (even if retirement is far in the future). Having an idea of what you can realistically anticipate from the sale of the business is critical to ensuring you’ll have enough to live comfortably in retirement.
With time on your side, you can start developing a tax minimization strategy with your accountant, talk to your advisor about addressing potential income gaps, and make strategic decisions to increase the value of your business over time.
Reason No. 3: Ensuring your business is properly protected
A recent study found that 90 percent of business owners are either underinsured or have no insurance.3 Your insurance needs will evolve as your personal circumstances and the business change over time. But when are you taking time out of your busy schedule to actually check your coverage and compare it to your current needs? The answer is, probably not often enough.
A real-time business valuation lets you know how much coverage you need to fully protect your biggest and most valuable asset. Use it to make sure you’re not underinsured and exposed to risks, or overinsured and paying too much to your insurance provider.
Reason No. 4: Creating a succession plan
Nobody likes to admit it, but we won’t live forever. Eventually, you’ll want to retire, or at least step away from overseeing operations. So when the time finally comes to hand the keys over, what will you do with your business? Sell? Merge? Transfer to a child or grandchild?
Your succession plan plays an important role in the long-term success of your business and your own personal well-being. Having a current business valuation is necessary when establishing expectations, determining payouts, setting a purchase price, and more.
Reason No. 5: Knowing what to pay when buying a business
Even if you have no plans to sell your business in the near future, it’s possible you could be looking to expand by acquiring another. Again, having a clear and accurate understanding of what your own business is worth should be at the top of your to-do list when considering buying a business. When you and your team of attorneys and financial professionals are crunching the numbers and drafting a deal, having up-to-date data is critical to making the buying process go smoothly.
Reason No. 6: Getting what your business is worth at sale
When the time does come to sell your business, you deserve to get every penny of what it’s worth. A current business valuation can help you and your professional team determine a sale price, and better yet, justify that sale price to potential buyers.
Reason No. 7: Creating accurate buy/sell agreements
If you have partners or stakeholders, buy/sell agreements are standard arrangements based on the value of the business and their participation in it. These contracts should be updated every so often to reflect the current value and status of the business, as an outdated contract may not reflect the fair market value.
Reason No. 8: Exploring funding opportunities
If you’ve ever considered bringing on private investors or asking the bank for a loan, you understand the importance of having accurate information. Anyone who is considering giving you money will require comprehensive data about your business, including its current valuation.
Reason No. 9: Building an estate plan
An estate plan is meant to be a dynamic, ever-evolving strategy based on your assets, liabilities, and final wishes. As an owner, your business needs to be accounted for within your estate plan alongside your personal belongings and accounts. Periodically checking in on the value of your business will help you maintain an up-to-date estate plan and better prepare your loved ones to take over.
Reason No. 10: Preparing for taxable events
Selling or transferring your business is often considered a taxable event. Without taking proactive measures to prepare, you could be liable for a large tax bill after selling your business. Before moving forward with a sale, use a current business valuation to talk to your tax professional about tax minimization strategies. You shouldn’t have to pay a dollar more to the IRS than is legally required, which is why using an accurate valuation to prepare ahead of time is crucial.
The importance of a business valuation
With real-time online platforms like BizEquity, business owners can finally gain valuable insights into the health of their business without waiting weeks. Learn more about how BizEquity helps business owners throughout the lifecycle of their business.
Sources:
1FPA/CNBC Business Owner Succession Planning Survey, 2015
2IBIS World, 2014
3Marshall & Swift Boeckh, 2017
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