Many small business owners don’t know what their business is worth, a practice that can be risky business.
A whopping 98% of small businesses surveyed by M&T Bank over the past two years did not know the value of their businesses. This is especially troubling, given that for most business owners, their business is their most valuable asset.
“People whose home is their biggest asset want to know what it’s worth. If you open a brokerage account, you want to know how much it’s worth. You would never give your money to a financial adviser who told you to trust while they invest it and never realize its value to you,” said Travis W. Harms, who leads Mercer Capital’s family business advisory group. “It’s not because your business is not liquid wealth than it is real wealth.”
Here are five points to help entrepreneurs understand the importance of valuing a business.
Valuation is essential to run a business and sell it
Many business owners may be too overwhelmed with day-to-day operations to focus on building value for their business. Others don’t want to spend money or simply don’t realize the importance of having an objective third-party measurement of its value.
An assessment, however, can be critical for many reasons. These include an impending sale, issuing stock options, estate planning, tax and estate planning, raising capital, implementing a purchase agreement- sale, insurance needs or to obtain corporate financing, said Robert King, a partner in Crewe’s investment banking team. .
Suppose, for example, that you wish to offer shares of the company to a member of your family. It is important to understand business valuation for tax and estate planning purposes. Another reason to add value to the company is to serve as a checkpoint so that the partners are all on the same page. Even if there is a buy-sell agreement, there may be disputes over how a business is valued for separation purposes. Having realistic expectations for the business down the road can prevent a protracted and messy fight over the value of the business if the time comes for the owners to go their separate ways, Harms said.
Knowing the current value of your business is also important because many owners don’t plan to sell their business until a suitor comes knocking, says Brett Dearing, partner and exit planning specialist. with the asset management company Cerity Partners. If you don’t have a current rating, you will be at a disadvantage from a trading standpoint. You could either have too rosy an outlook for your business or grossly underestimate its potential.
“Many business owners don’t understand the value of their business until they sit down with a buyer at the negotiating table,” Dearing said.
Certified experts exist to enhance your business
One of the best ways to find an expert to add value to your business is to go through one of the three accrediting bodies.
The Accredited in Business Valuation designation is granted by the American Institute of Certified Public Accountants to qualified CPAs and valuation professionals who meet the requirements. There is also business appraisal certification by the American Society of Appraisers. And the National Association of Certified Appraisers and Analysts offers the Certified Appraisal Analyst designation.
Although having one of these certifications alone does not guarantee the quality of an appraiser, it should be your starting point given the level of expertise required by these designations, said the professionals of business valuation.
The cost of calculating an appraisal will vary
There is no single answer to the question of cost, as it largely depends on the size and complexity of the business, the scope of work required, and the purpose and scope. intended use of the assessment, Harms said.
Given these parameters, an appraisal can cost between around $5,000 and around $50,000, depending on appraisal professionals. Be sure to be specific with the appraiser about why you are seeking an appraisal so that they deliver what you ask for.
Some of the assumptions that go into a valuation for purposes of estate planning or issuing stock-based compensation could be significantly different from those used to raise capital or sell a business, King said. “One size doesn’t fit all,” he said.
Business owners should update this asset value regularly
Depending on why you need the assessment, it may be something you do every year or every few years.
It can also be done more frequently when trying to grow your business. M&T Bank offers a free digital platform that allows companies to model the impact of different outcomes on their valuation. It’s not an accredited assessment, but the service provides a baseline before taking the next step, said Jonathan Kolozsvary, new business director at M&T Bank.
Assessing the business regularly can help you identify weak points and make improvements. “If you go through the assessment process and the value isn’t quite where you want it to be, you can improve the assessment based on the identified areas,” said Tami M. Bolder, director of CBIZ. Valuation Group. “It’s also useful for general planning purposes,” she said.