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Three “Good” Reasons to Get a Business Valuation

October 14, 2015

Most people have a good idea of what your car is worth and they likely know with reasonable certainty the price for which their home would sell. When it comes to the value of their business, they haven’t the foggiest notion. Other than the fact that it is likely their most valuable asset, there are some very legitimate reasons to invest in this type of professional service. The list of reasons for getting a business valuation is extensive and unfortunately, many on that list have depressing words such as divorce, bankruptcy, tax, and death in their descriptions. Now because everyone loves a happy list, here are three less disheartening reasons to get a business valuation:

1. Business planning

Analysis of your strategy
I hold that business owner in the highest regard who goes through the exercise of setting business goals. It is an often overlooked aspect of running a business; the day-to-day activities of the enterprise can be exhausting and finding the energy to scrutinise it is difficult. Those that do it, however, may find traversing all the metrics difficult and can get fixated on top-line growth. Although growth is imperative, going through the exercise of a business valuation forces one to look at the company through the lens of a buyer. It uncovers the other aspects of the enterprise so that emphasis can be distributed to all important areas.

 

Unanimous Shareholder Agreements (a “U.S.A.”) – Buy-Sell Clause

If you aren’t the sole shareholder of the business, it is critical to have a U.S.A. drawn up by your lawyer. Being without one is like being without a will and I can’t stress the importance of getting this done. Although there are many aspects to a U.S.A., often the Buy-Sell portion can have the most financial consequences to the shareholders. It is an often underdeveloped piece despite its importance in determining the value of your business under unexpected circumstances. It can outline valuation methodologies in the event of death or disagreement or even indicate the name of the firm to do the assessment. A business valuation professional can assist your lawyer in the drafting of these clauses to avoid disastrous unforeseen circumstances.

Financing:
Sometimes through the process of developing the strategy for your business, the need for financing is identified. A valuation of the company can augment the business plan and help secure bank financing.

2. Retirement planning

Some have estimated that 65 to 85 percent of business owners net worth is the value of their business. It is very likely then that the sale of that asset will primarily fund their retirement. Understanding the current value of the company is vital to determining their retirement horizon. Getting an assessment early can not only help predict when a business can be reasonably sold but allow for altering its course if it isn’t measuring up to expectation.

3. Selling

When the time comes to sell one’s lifelong achievement, a professionally prepared valuation can increase the odds of a favourable outcome. The key, however, is in the timing of the assessment; before marketing the enterprise is imperative. By having the evaluation done ahead of time provides – among others – the following advantages:

  • Speed up the sale – When the business owner understands their present value, there are no false expectations out of the transaction. Negotiating an unrealistic price can delay the deal or cause the loss of the deal entirely. Having the credibility of a professionally prepared valuation can facilitate the transaction as well.
  • Peace of mind – While some owners overvalue their business, the opposite can be true. Some business owners undervalue their life’s work and leave money on the table. A fairness opinion by the valuation professional can provide the peace of mind needed in this critical transaction.
  • Increasing sale price – As mentioned before, if the valuation process is contemplated in advance, course corrections can be made to improve profitability and sale price. Action can be taken on recommendations outlined in the analysis which can lead to a more comfortable retirement.

Unfortunately, there are no simple methods of determining an accurate value of a company. The unique qualities that make it attractive to customers are also the same qualities that make it unique and unsuited to online and rule-of-thumb methods. A professional business valuator can help you traverse the assessment maze and help you confidently arrive at your real value.

If you have any questions regarding these types of valuation engagements, please give us a call at Enterprise Valuators to start the discussion.

www.enterprisevalutors.com

1-844-283-6367

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