As a business owner you may know your business inside and out, but do you know the value of your business? The value of your business is more than just a number. Knowing and understanding the true value of your business, and what impacts its value, makes all the difference not only from a tax perspective, but also when it comes to exiting/selling or merging your current business. In other words, it is essential to understand the foundation of your business, consider all of the factors that affect your business and be aware of the outside factors that you may or may not be able to control that can also affect your business.
Similar to a house, the foundation of your business is everything. The success of your business depends on building a strong base for your business. But, as a business owner you already have so much ground to cover that sometimes a small crack in your business foundation can be dismissed or overlooked for the lack of knowledge of its value – or potential cost – to your company. A mistake that can prove to be fatal in the long run. Ensuring a strong foundation is imperative in understanding the value of your company assets.
But, how can you know the value of your company assets? The best way to determine the true value of your business is through a business valuation. The goal of valuing your business is to attain a clear estimate of the fair market value of your business, which is defined as:
“…the price at which the property will change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having a reasonable knowledge or relevant facts.” (26 CFR 25.2512-1 – Valuation of Property; in General.” LII / Legal Information Institute, Legal Information Institute, www.law.cornell.edu/cfr/text/26/25.2512-1) And, while, the mere knowledge of this information affords you power as a business owner to better understand your business, there are so many other benefits to conducting a formal business valuation.
A business valuation helps you understand your company’s resale – or EXIT – value, giving you access to more investors while helping to measure your company’s growth. Additionally, you might not have thought about it yet, but your retirement also depends on your business and its value. And how can you calculate your retirement income when you don’t know the value of your primary asset? A business valuation can help to answer this question.
It’s important to understand the factors that may drive the value of your business higher for different reasons. While every business owner’s goal is to have a profitable business, your long-term goals might be to eventually be able to sell your business through a smooth transition. A business valuation can help you prepare for this, whether your goal is to merge your business with another business, passing it down to a family member, or preparing a successful exit strategy plan.
It is the successful exit that is most important to consider. So few business owners properly prepare for exit. Most simply operate their businesses as going concerns, not paying much if any attention to the long-term goal of ultimate sale/exit. As the famous saying coined by Benjamin Franklin says, “Failure to Plan = Planning to Fail”. Business owners that don’t put the right protections in place, secure the right foundation, hire the right people, cover the right bases, or take the right actions and measures are sure to lose precious dollars when it is time to exit as their businesses will sell for pennies on the dollar. The due diligence process that is undertaken by the purchaser may even fail, and the whole exit may fall apart. All because the business owner chose to stick his/her head in the sand and pretend everything was A-OK – but it was NOT!
Working with the right professional team at your side and preparing the company properly for an ultimately successful exit will admittedly require time and effort and painstaking attention. However, by working with the right team, and building up the business’s value so that the ultimate valuation results are that much stronger, the end result will be a significantly more lucrative exit that would otherwise be realized. The business valuation results will not only help your business be more profitable but will also help you understand all your options and what makes the most sense for you and the success of your business.
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