Why Every Business Owner Should Know the Value of Their Business

By Edward L. Fixen

Most business owners think they don’t really need to know the value of their business until they are ready to sell or just don’t consider it a priority when weighed against other business demands.  Unfortunately, many business owners that wait until they are ready to sell, wish they had obtained a business valuation years in advance.  This article outlines some of the reasons why every business owner should know the value of their business well in advance of selling.

Retirement Planning – A major component of a business owner’s wealth usually consists of the value of their business.  Whether you’re in your 30s, 40s or later, when it comes to retirement planning with your financial planner, the plan is incomplete without including the value of your business along with real estate, stocks, 401k’s and other investments.  There is a high level of attention to the growth, appreciation and utilization of these other conventional investments for retirement planning purposes, yet very little attention given to the current and future value of your business.  That’s ironic given the sweat equity and financial investment most business owners put into their business.  In order to properly plan your retirement, it is absolutely critical to know the current value of your business and the steps necessary to achieve a future business value to reach your retirement goals.  Do yourself a favor, don’t rely on rules of thumbs or anecdotal stories about the sale of one of your competitors when it comes to such an important piece of information.  A professional business valuation will give you a value specific to your business and arm you with the knowledge to understand how to get to your target value for retirement.

A Prospective Buyer Shows Up Unsolicited – Growth through acquisition has been a common strategy for many successful companies and investors.  Other successful and growing companies in your industry and private equity investors are always in search of the next opportunity to grow through an acquisition and invest in a company that meets their investment criteria.  Be prepared and informed of what your business is worth before they show up seeking to acquire your company.

Alternatively, a business valuation might help you identify that you may need to grow through acquisition yourself in order to achieve your personal financial goals for retirement.

Don’t Leave Money on the Table – A good business valuation will identify the key factors that negatively affect the value of your business.  Knowing these factors years in advance of selling will give you time to address these factors and not leave money on the table.  I’m not talking about just the obvious financial factors like revenue growth, income and profit margins.  Obviously, these financial factors are very important but there are many other factors that prospective buyers will consider in determining what price they are willing to pay.  For example, some of the most common factors identified in a business valuation that can result in either an increase or decrease in the value of a business include depth of management, diversity of your customer base, accurate financial records and reporting systems and inventory management (if applicable) to name a few.  Any one or more of these factors that are viewed in a negative light can result in a significant discount if not addressed before you sell.  A business valuation will tell you not only which factors are negative so you can address them in advance of selling but will help you understand the value of those improvements in terms of dollars realized when you do sell your business.  For example, a business valuation would give you an indication of the value in real dollars of hiring a key employee that improves the depth of your management team and reduces transition risk for a prospective buyer but otherwise just seems like additional salary expense.

Measuring the Real Value of Business Improvements & Investments – Comparing results of income statements, balance sheets, margins, etc. are certainly a means of measuring business performance but ultimately isn’t the impact to the value of a business what really matters?  It’s entirely possible for a business to appear profitable on an income statement but still have negative cash flow because of changes in working capital, changes in debt and capital expenditures or have high financial risk because the business is highly leveraged or made poor investments in capital expenditures.  These factors are taken into consideration in a business valuation which will indicate whether your business efforts and investments have truly resulted in an increase to your business value.

Conclusion – Every business owner should invest in knowing the value of their business for any one or all of the reasons above. It’s a great investment for the information it will provide for personal and business planning purposes and the potential to significantly increase the value of your business.

Author: Mr. Fixen is a Certified Business Appraiser (CBA) and Certified Business Broker (CBB).  Mr. Fixen is the President of BusinessQuest, a business valuation and M&A brokerage firm serving small & mid-size, privately-held businesses throughout Southern California and can be reached at (909) 636-9827 or www.BusinessQuestInc.com.