Knowing The True Value Of Your Business Is Important For Decision-Making
Believing your business is worth more than it actually is can result in major problems, especially if you want to sell your business or retire by a certain age. The misstep many business owners tend to make is failing to take industry trends, real cash flow expectations, and true risk profile and debt levels into consideration. And failing to consult with a valuation professional will most likely result in a flawed understanding of how the business valuation process works. This flawed understanding leads to your business being under- or over-valued, which can ultimately impact your ability to make effective business decisions.
Read Also: The Simple Truth About Your Business’s Value
The ‘Have To’s’ And The ‘Should Do’s’
First, it’s important to understand the difference between a “have to” business valuation and a “should do” business valuation. The former is a reactionary response triggered by a specific event, while the latter is used by business owners who are looking to arm themselves with the information necessary to make important future-facing decisions.
“Have to” valuations include:
- Gifting of closely held stock
- Death of a shareholder
- Dispute related response
- Forming an employee stock ownership plan (ESOP)
- Converting from a C-corp to S-corp
- Updating the business’s value in a buy-sell agreement
- Charitable contributions
“Should do” valuations include:
- Estate planning
- Succession planning
- Determining life insurance needs
- Selecting an exit strategy
- Find ways to increase value
- Updating the business value in important documents
Prior to starting the valuations process, you will need to have an idea of what you would like to do with the results.
Timing Is Everything
For the most part, “have-to” valuations, need to follow a set time frame because they are dependent on triggering event. Most likely, the IRS or the court will set these time frames. That being said, it’s always important to know the true value of your business if any future planning initiatives are on the table, because certain strategies involve planning at least five years in advance for implementation. A good rule of thumb is to have a business valuation completed every two years. Because the business your most valuable asset, this type of timeline is completely reasonable as it allows you to know the true value of your major assets at any time.
Finding Ways To Grow
Getting into the right mindset is key when trying to grow a business. For starters, it’s important for you to consider your business as you would any other investment – and keep in mind that it’s not just any investment, it’s likely your largest one! And the best way to increase the value of your investments is to understanding their true value. Only with this information can you set realistic growth goals.
A solid growth plan should have written goals and strategies to increase the value. Consider focusing on the following areas:
- Decreasing risks: The more risky an investment is, the harder it is to find a buyer. Business risks include over reliance on the owner, key employees, customer concentration and supplier concentration.
- Increasing cash flow: Investors act on future cash flows, so increasing cash flows will increase business value.
- Improving growth prospects: Expanding your business in growth areas will increase its growth rate and result in a higher value of the business.
Knowing the true value of your business allows you to take advantage of growth opportunities while strategizing for the future. Email the business valuations and transitions team at Rea & Associates to learn more about your options and get started.
By Mary Beth Koester, CPA, CEPA (Dublin office)