According to a 2018 study conducted by MassMutual, 70% of business owners frequently wonder about the value of their businesses. Valuation is the process that determines how much a business is worth. Business valuation is used mainly by investors or buyers to decide how much money they will be putting out, either to buy a business or to invest in it.
The circumstances of the valuations and the reasons for it are both important in the actual valuation. Those factors will play a role in the final value of a business.
Here are the top reasons as to why you should have your business valued:
Projecting Your Retirement Income
Despite the importance of exit planning, more than half of business owners haven't considered how to manage their business in the case of death or retirement. These business owners also thought about where their retirement income was coming from, or if their business could sustain their retirement for years to come.
Valuation allows business owners to accurately determine how much they're relying on their business income for day-to-day expenses, and how much they will have to allocate from their business to support their retirement. If you're underestimating the amount that your business is worth, you could be jeopardizing your ability to retire comfortably. Business valuation can help give you confidence when it comes time for you to leave your business.
A Chance to Sell
Perhaps the main reason why you should have your business valued is that you might get an opportunity to sell or to merge. Among respondents consulted in the 2018 study, only 40% of business owners had a buy-sell agreement to protect the future of their businesses. Sometimes, these important decisions need to be made right away, and one of the most important pieces of information you would need then is the actual value of your business.
Without knowing the value of your business, you cannot negotiate for the right price.
You Are Planning for Your Exit
An exit strategy is something that all business owners should begin to consider at all stages, and it doesn't necessarily mean selling off a business or even closing it off. The way you decide to exit your business will determine the extent of your involvement after you leave. For instance, many business owners are forced to remain involved with their business indefinitely because their financial reliance on the business makes it impractical to retire. Knowing the value of your business can give you the flexibility you need to exit in the way that's best for you.
An exit strategy could also be a means for you to restructure the whole business. You could be handing it over to a family member for example. In any case, you would need to know the actual value of your business.
In addition, although a majority of business owners believe that their retirement fund is adequate for their exit, often times this is not the case.
You Might Want a New Partner or Your Partner May Exit
Another good reason why you may want to have your business valued is that you might want to take on a new partner. You need to know the actual value of the business in that case so you can determine the amount that the prospective partner would have to bring in.
Just as you would need the right information regarding the value of your business when you are getting a new partner, you also need it when a partner wants to exit.
You Are Planning on Expanding
If you are planning on expanding your business, then you might need a loan from a bank to get enough funds. In which case, you need to have a valuation of your business available because the bank will want to see that for sure.
Sometimes, things might not turn out the way that you want them to. That includes situations involving your family. Having a valuation for your business ready can help you deal with family issues such as divorce.
The court will want to see a valuation of your business as an asset.
These are just some of the reasons why you should have your business valued. The reasons may be varied, but they are all important. Learn more about how we can help you help your business here.
The Piedmont Group does not provide qualified business valuations. For a qualified or certified business valuation, consult a properly credentialed appraiser.