4 Benefits of Getting a Business Valuation
As a business owner, you've likely poured blood, sweat, and tears into building your company, not to mention the long hours, late nights, and frustrations of owning your own business. But it's all worth it to be able to do what you enjoy and deliver an important product or service to your customers. While it may be driven by passion, at the end of the day, you'd still like to have a business that is of some monetary worth, particularly if you're building for Enterprise Value. While you may have a good sense of your cash inflows and outflows, there is greater value in knowing how much a third-party would be willing to pay for your business today. In other words, there is value in knowing your value. Let's talk further about why this is so important:
#1 - Retirement Planning
While no one can predict the future, we do the best we can to plan for it. As a business owner, one of the greatest assets you own is your business, or at least you hope that's the case. You're either building for Enterprise Value, with plans to sell someday to fund you're retirement; or, you are building a lifestyle practice, where you can fund your retirement by working later in life, having more flexibility, and funding retirement with a combination of business cash flows and savings.
If you're building for Enterprise Value, with plans to sell, knowing your value today is critical in planning for retirement/financial independence. In the same way you wouldn't go years without looking at your bank account or retirement accounts, you wouldn't want to go years without knowing the value of your company. Without that input, it's essentially planning for retirement without knowing how much you're currently worth.
Having an estimated value, even if it's a rough estimate, is vital for retirement planning. It allows you to see the retirement lifestyle you could have (if you sold today), and how much more value you need to bring to the company before you can fund the lifestyle you want during retirement (or to fund your next venture).
#2 - Succession Planning
On those same lines, when planning for your eventual exit, you may have partners, employees, or family members who are interested in buying you out. This is typically a multi-year process that takes careful, precise planning. In order for the incoming partners to begin the buyout process, there must be a value assigned to the company shares/ownership units. This will also be important for tax planning purposes. Depending on the value of the business, your basis in the company, and your personal tax situation, there could be major tax implications for being bought out. Understanding the value of your company allows you to plan ahead for tax liabilities. And of course, if provides a basis for incoming partners.
#3 - Risk Management
You may also need to know the value of your company for Risk Management purposes. For instances, depending on the situation, it may be prudent to establish a Cross-Purchase Agreement funded by life insurance, or maybe even to purchase a Key Person insurance policy. In either case, the amount of coverage necessary will be partially dependent on the value of your business. And of course, the value of your business changes over time, so the insurance coverage you purchased 5 years ago may no longer be adequate. That's just one more reason why knowing the value of your business can help you make more informed financial decisions about your business.
#4 - Value Enhancement
Finally, a robust, comprehensive valuation should provide insight into ways to further increase your value by identifying gaps in your business. For instance, this could be client demographics, industry trends, ownership structure, etc. There are many components that impact the final valuation, and understanding those components can give you direction on enhancing value. It can also serve as a great baseline from year-to-year. Similar to an annual physical with your doctor, it provides you with information and measurements that tell you what to keep doing and what needs to change. Then you can compare these metrics from year-to-year as you progress towards your goals.
There are, of course, are many more situations in which a valuation is necessary, but I think these are the most common. So if you really don't have a good measure of how much your company is worth today, consider engaging a professional to help you with that. I think the return on that investment will be well worth it.