Business Valuations Help Owners Grow and Protect Value
The wealth of 70% of small business owners is tied up in their businesses, making their companies their primary retirement savings vehicles. But without knowing the value of the business, how can they know when they can stop working, or what kind of lifestyle to expect in retirement?
A business valuation can be critically important in planning your future. There are different levels of valuation detail and you don’t need to spend a lot of money to gain productive insights.
Thanks to innovative technology, a business valuation no longer needs to be the complicated, invasive process that it used to be. Today, leveraging the power of big data and sophisticated software, useful business valuations can be created in a few hours. Many business intermediaries (including Venture 7 Advisors) will complete them free of charge for clients.
There are many ways that a business valuation supports building and protecting company value. Here are a few of them:
Increase the value of your business. Finding out what your company is worth is the first step to making it worth more. A comprehensive valuation will tell you if your company is headed in the right direction or if there are specific steps you can take to enhance value.
Timely Strategic Decisions. The value of a business depends, in part, on the current merger and acquisition market. Every owner should be prepared to align their exit plans with market realities. Periodic business valuations reveal opportunities for early or especially successful exits. They may also reveal the advantage of postponing an exit. Either way, a valuation enables strategic decision making.
Capital infusion. Outside investors and lending institutions review business valuations as well as business plans, shareholders’ agreements, investment memoranda, and other information before investing or lending capital. Objective valuations improve your capital options and negotiating position.
Tax reduction strategies. A valuation report can lead to tax benefits an owner might not otherwise claim, making more cash available for growth and increasing your options for exit structure and timing. A current valuation is required for S-Corporation elections, estate tax settlements, calculating capital gains tax liabilities, and for income or property tax disputes. (Note: an informal valuation estimate may reveal opportunities to reduce taxes, but a formal opinion of value, performed by a certified valuation professional, is recommended for the implementation of major tax strategies.)
Employee incentive programs. The best incentive plans motivate employees and keep them on board based on formulas that link compensation (cash or stock-based) to growth in business value. An objective business valuation is essential to administering a fair plan.
Dissolution of partnership or partial exit by an owner. When business partners agree to part ways, they have to find a fair and equitable split of interests. A business valuation allows the partners to make decisions based on facts, not opinions. Most partnership agreements call for updating company valuations annually, a requirement that many business owners neglect.
Divorce. Business ownership is usually a marital asset, and is often a part of an owner, partner, or shareholder’s divorce settlement. Spouses may approach divorce settlement proceedings with independent business valuation reports, so historical valuations could provide important insights.
Insurance planning. Nearly three-quarters of small businesses do not have adequate insurance coverage. When an owner doesn’t know the value of his/her business, it’s impossible to determine how much insurance is needed. Also, if an owner is injured or wrongfully distracted from business, a historical valuation could help recover losses.
Conclusion
Too many business owners operate for years without really understanding how their day-to-day decisions impact the value of their company. An objective valuation helps owners to prioritize efforts that are most likely to increase and protect long-term business value. There was a time when securing a valuation required an expensive and invasive process, but those days are over. Modern technology makes securing a meaningful business valuation easier than ever.
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