Many small company owners don’t know what their enterprise is worth, a practice that can amount to risky business.
A whopping 98% of small businesses polled by M&T Bank over the past two years didn’t know the value of their companies. This is especially troubling, given that for most business owners, their company is their most valuable asset.
Here are five points to help entrepreneurs understand the importance of valuing their business.
Valuation is Critical to Running a Business, and Selling It Many business owners may be too overwhelmed with day-to-day operations to focus on having their company valued. Others don’t want to spend the money or simply don’t realize the importance of having an objective third-party measure of its worth. A valuation, however, can be critical for many reasons. These include an impending sale, the issuance of stock options, succession planning, tax and estate planning, capital raising, implementing a buy-sell agreement, insurance needs or to obtain business funding. For instance, you want to gift company shares to a family member. Understanding the company’s valuation is important for tax and estate-planning purposes. Another reason to value the business is as a checkpoint so partners are all on the same page. Even if there’s a buy-sell agreement, there can be disputes over how a business is valued for the purposes of separation. Having realistic expectations for the business along the way can prevent a prolonged and messy fight over the company’s worth should partners wish to part ways. Knowing your business’s up-to-date worth is also important because many owners don’t plan to sell their business until someone mentions their interest in buying. If you don’t have a current valuation, you’ll be at a disadvantage from a negotiation standpoint. You could either have an overly positive outlook for your business, or conversely, be grossly underestimating its potential. A lot of business owners don’t understand the value of their business before they sit down with a buyer at the negotiating table.
The Cost of Calculating a Valuation Will Vary There’s no single answer to the question of cost because it depends largely on the size and complexity of the business, the scope of work required, and the purpose and intended use of the valuation, Harms said. Some of the assumptions that go into a valuation for estate planning purposes or issuance of equity compensation could be decidedly different than for raising capital or selling a business.
Business Owners Should Update This Asset Value Regularly
Depending on what you need the valuation for, it can be something you do annually or every few years. It can also be done more frequently as you are trying to grow your business.
Valuing the business regularly can help you determine weak spots and determine areas that need improvement.
For more information on business valuation, contact Succentrix Business Advisors.
SUCCENTRIX BUSINESS ADVISORS "Your full-Service, Cloud-Based Accounting & Tax Professionals." Accounting, Bookkeeping, Payroll, Tax Preparation, Tax Resolution, Business Valuation, Business Advisory
Munk, C. (2022, July 17). Most small business owners don't do the math on their most valuable asset. CNBC. Retrieved August 9, 2022, from https://www.cnbc.com/2022/07/17/most-business-owners-dont-do-the-math-on-their-most-valuable-asset.html