Do you really know the value of your business? It’s OK if the answer is “no.” When it comes to smaller business owners and the value of their business, value is a broad term that focuses more on the customer, while the big corporations are concerned about their market worth and share. This is not a knock on the big corporations. They became hugely successful for a reason—which is partly due to their ability to leverage value to grow.
But business owners not knowing the value of their business is an incredibly poor idea. Why? Well, for several reasons—one of which is this: making important choices about how and when to raise capital or even buying another company to boost your offerings can be difficult.
When it comes to business owners and the value of their business, a 2018 Business Owner Perspective Study found that 70 percent of business owners generally don’t have an accurate sense of their companies’ worth, let alone valuation of intangible assets. The valuation process they use is based on past performances and industry competitors instead of seeking valuation advisory services.
As an owner, you may not need to expand, or want to raise capital, and that’s fine. In business, everything has value—customers, employees, physical structure, etc. It is important for business owners to know the value of their business to protect the hard work and investment when making critical financial decisions.
What is the Importance of Accurate Business Valuations
The benefits of business owners knowing the value of the business vary depending on needs, ranging from obtaining credit to maximizing a retirement fund for later in life.
- Credit – Financial lenders want to see an accurate picture of the business’s worth in addition to revenue numbers when determining borrowing capacity.
- Later-life – Handing the business keys to an heir is common, but not always the case. Using valuation advisory services, for example, can help avoid taking an unnecessary financial hit if the owner decides to sell to fund their retirement.
- Buy-sell deal – Having an accurate valuation is critical to parties involved in a buy-sell agreement being treated fairly.
The Valuation Process
When it comes to business owners and the value of their business, valuation service providers are typically trained professionals. The process can be completed online with a mix of in-person contact.
- Groundwork – Determine why you are seeking a valuation and provide information that will help create a valuation.
- History matters – Past financial documentation, such as statements and balance sheets, are necessary for companies that provide value advisory services. Three to five years should be enough to help create an estimate for business owners and the value of their business.
- Find the right method(s) – There are various valuations you can undertake, such as asset, market or income. A value advisory service provider helps with the selection process. Using multiple methods provide a check-and-balance, this way you know the valuation is correct.
- Apply the method – With a process decided, a business owner and the value of their business now has a more accurate and clear assessment of worth, aside from any differences. If there are discrepancies, your value advisory services provider can help you continue to reconcile worth.
What is the Value of Intangible Assets?
Intangible assets are not physical by nature, and are not easily transformed into hard cash when it comes to business owner and the value of their business.
Examples of intangible assets include:
- Customer lists
- Brand recognition
Intangible assets do provide value as a mechanism to generate revenue, especially patents if licensing deals are involved. A value service provider calculates the worth of intangible assets through the CIV (calculated intangible value) process.
The Takeaway …
When it comes to business owners and the value of their business, there are several steps and options available to accurately determine financial worth. While it may seem laborious and unnecessary, keep in mind some of the points above. The reality is at some point you will leave your business. Valuation service providers will help determine the company’s worth as you transition into your next phase running the business or decide to tackle the next chapter of your life.
For more information on valuing your business for a future sale reach out to Green Ridge Wealth Planning to schedule a call today.