If you think your business is worth $2 million dollars just because your annual revenue is also $2 million dollars, you are likely wrong. If you hope one day to have a successful transition of ownership but do not know the value of your business you may be in for a big surprise, and not a pleasant one. Most owners experience this “surprise” only after a lifetime in their business. By then they have plans for their next chapter based on a million-dollar assumption. They also have little interest in recalibrating their expectations or investing time and money into enhancing the value of the business.
As a Business Broker and Mergers & Acquisitions Advisor, I am quite often the first person to provide a professional opinion on the value of their business. As a result, I see this unpleasant scenario on a regular basis. The good news is with a little foresight this can easily be avoided.
There are many reasons you should know the value of your business. To follow are just a few. As you will see, in some cases, the sooner you know it the better off you will be.
Exit or Succession Planning. You cannot create an effective plan for your eventual exit without knowing the current or future value . In addition, if the current value is much less what you need it to be in the future. The sooner you know the value of your business the more time you will have to make plans based on reality. You will also know if you need to work on enhancing the value. If you do this well in advance of your exit you will have the time needed to make the necessary changes.
Funding. This may be for business reasons such as reinvesting for growth or buying another business. This may be for personal reasons such as buying a second home, sending your kids to college, or funding your retirement. According to CNBC and the Financial Planning Association, 78 percent of small-business owners plan to sell their company to fund 60 percent to 100 percent of their retirement, yet very few are aware of its true value. Without this knowledge, it will be difficult for these entrepreneurs to ensure they receive the correct level of compensation for the company they've worked so hard to build.
Disputes. Partners or shareholders have a disagreement. Owners get divorced. Parties bring lawsuits. These things happen. Having the value of the business determined by a properly trained independent third party is the only way to remove bias. Should the need arise to go into court or deal with the government over taxes; a certified valuation will be required.
These problems are easily dealt with by getting a valuation of your business. When you do make sure you properly vet the person or organization you hire. Do not assume that your accountant can do the job or fall prey to those who claim they can. Whomever you hire should be able to prove both their training and depth of experience.
In closing, think about one of Benjamin Franklin’s more famous quotes; “By failing to prepare, you are preparing to fail.”
Written by Dean LoBrutto,
the founder and CEO of ValueCap Inc. based in Rochester, New York. He is also an M&A Advisor and Certified Business Intermediary with the International Business Brokers Association.