HOW MUCH IS YOUR BUSINESS REALLY WORTH?
Knowing and Growing Your Value
A 65-year-old business owner started to think about retirement, as many 65-year-old business owners do. He figured he would sell his business to his daughter, who had no liquid savings. Because of his accountant’ s value calculation, which was based on“ a rule of thumb,” he expected his company to be worth $ 2.5 million – and to enjoy the retirement lifestyle of his dreams, he would need every penny of that. But after having a professional business valuation conducted, he discovered that his business was actually worth less than $ 1 million.
If he had a clear picture of what his business was really worth five years sooner, he would have probably done things very differently. Rather, he was forced to drastically change his retirement plans.
How a Business Valuation Can Work for You
Imagine the shock, and sometimes horror, of finding out that the path you are heading down isn’ t what you thought it would be. Unfortunately, this happens to business owners every day. They think they have a good idea of what their business is worth, but alas, they are pretty far removed from reality.
Several family business surveys have found that the majority of business owners don’ t really know the value of their business. As a result, many business owners fall into one or more of the following traps:
• They make a retirement assumption, based on faulty data
• They sell their business at the wrong price or at the wrong time
• They don’ t pay attention to the timing of any gifts for their succession planning
• They pay more in taxes
• They don’ t understand the key valuation drivers and don’ t make concrete plans to grow the value of their business
This is where a business valuation comes in.
As a business owner, you can’ t afford to base your business’ s value on a guess.
‘ Have To’ Valuations Versus‘ Need To’ Valuations
Many of the valuations our team has conducted have been“ have to” valuations, triggered by some kind of change or major event, such as a stockholder leaving the company or the death of a stockholder. If you find yourself in one of these situations, you’ ll also find yourself in need of a valuation. by: Mark Fearon
CPA, CGMA, Principal 122 Fourth Street NW | PO Box 1020 New Philadelphia, Ohio 44663( 330) 339-6651
But even when it’ s business as usual, it’ s critical for you to know your business’ s value. Business valuations shouldn’ t be a“ have to,” they should be a“ need to.” Your business is your biggest asset, so don’ t you want to know what it’ s worth?
Key Drivers In a Business Valuation
So, what exactly is a business valuation?
In plain English, a business valuation is the process by which you find the true value of your company. The major assumptions in any valuation are what the future cash flow is and what the risks are related to that cash flow. There are a number of key value drivers that help shed light on the overall business value.
A business valuation enables you to identify the key drivers that will increase the value of your company. You can determine how measurable changes in these value drivers will affect the overall value. The following are the three major areas where you can focus on in order to increase business value:
• Increase your sustainable cash flow. Buyers buy future cash flow, so increasing the future cash flow of your business will increase its value. Buyers love to buy cash flow that is sustainable and can grow in the future.
• Lower the risk associated with your business. A major factor in determining the price paid for a business is the required rate of return required by the buyer. The more risky the investment, the higher the rate of return needs to be to entice a buyer. There is an inverse relationship between value and the required rate of return. It is important that you understand your risk areas and take steps to reduce them.
• Increase the annual growth rate. The expected growth rate of the future cash flow levels will impact the value of a business. The higher the growth rate, the higher the value of the business. You can increase the value of your business by focusing on profitability and sustainable growth.
Positive changes to these drivers will affect your overall value. You could also benefit from more cash in your pocket, improved employee attitudes and increased customer satisfaction.
The Bottom Line
So your ultimate goal is to maximize your business’ s value, right? How can you do this? You need to increase future cash, decrease business risk and increase growth opportunities. For example, every dollar of additional cash flow you create can increase your overall value four to five times. If you can increase your bottom line by $ 100,000, your value can increase by up to $ 500,000. This provides more income for you now and a bigger payoff down the road. How’ s that for motivation?
So what are you waiting for? Get to know your business’ s value today. Call me to schedule a business valuation.