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 have the utmost respect for business owners who engage in the practice of setting business goals. The exhaustion of day-to-day business activities often leads many owners to overlook a crucial aspect: finding the energy and time to scrutinize their operations. However, those who take the time to do so may find it challenging to navigate all the metrics and may become 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, while developing your business strategy, you identify the need for financing.. 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 early assessment has two benefits: it helps determine the right time to sell the business and allows for adjustments if the business falls short of expectations. Read more about Exit Planning
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 – When considering the valuation process in advance, it becomes possible to make course corrections that enhance profitability and increase the sale price. By taking action on the recommendations outlined in the analysis, individuals can achieve 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.
The reasons to obtain a business valuation, can cover a wide range of circumstances and purposes but by understanding the value of your business, you can make informed decisions and pursue opportunities with confidence.
