Why a business valuation matters

If you are a business owner, one of the best things you can do for yourself is to understand the value of your business. A valuation helps shape your exit strategy, informs your financial planning, and can be critical to creating a contingency plan that adequately protects your family.

But more than future planning, a valuation can be the accelerator that helps you grow your business. It’s a benchmarking tool that shows where your business is strong and where there are weaknesses that could be shored up, from your financials to your operations.

Here are nine reasons to get a business valuation:

Increase value: If you are thinking about your future exit strategy for your business (and you should be thinking about it), a valuation should be part of your strategic plan. A market-based valuation goes beyond the numbers to identify where certain value drivers would impact real market value.

For example, customer diversification is a value driver. If you’re generating 45 percent of revenue from one client, buyers will see that as a risk. Other factors, like the strength of your management team or a weak safety record can impact business value—even though they don’t appear in your financials.

Know your true value: You may have a general idea what your business is worth, based on asset value or an online calculator, but there’s a lot that goes into valuing a business. The truth is, most business owner estimates are not in line with market realities.
When you work with a third-party valuation firm, you’ll get a more accurate understanding of what your business would sell for in today’s market. That information can help you decide if selling your business is even an option right now.

Expanding your business: If you’re looking to make a new investment in your business, and you need financing, your lender may want a valuation. A lender will have their own criteria for valuing your business, but a third-party valuation can streamline the process or help you rationalize a higher estimate.

Your retirement plan: You can’t engage in realistic financial planning when you don’t know the value of your primary asset. A valuation helps you plan for a comfortable, secure future.

Timing your exit: My go-to advice for business owners is to sell when the business value matches or exceeds their retirement goals, not when you reach a specific age or are burned out on the pressures of ownership. Regular valuations help you know exactly when your business is worth enough to fund your dreams, so you can time your exit accordingly.

Estate planning: If you run a family-owned business, and are planning a succession to the next generation, valuations are an important part of your estate and gift tax planning.

You may be planning gifts of stock to certain children (e.g., those actively involved in the business) with other asset distributions to your other children. Remember, though, the value of your business can fluctuate through no fault of your own.

Changes in the economy could complicate things, creating a situation in which the business shareholders receive a much smaller legacy than the children outside the business. Current valuations can inform these estate plans and ongoing adjustments.

Separations and departures: Whether we’re talking about a divorce or exit of partners or shareholders in your business, a valuation is essential in order to organize a buy-out. Ideally, you’ve had multiple valuations over the years, so when it does come time for a separation, you have an established basis for the business value.

Having a regularly updated business valuation, that everyone previously agreed to, can make a potentially difficult situation less stressful and contentious.

Protecting your legacy: What would happen if you were no longer able to run your business? A current valuation helps determine the appropriate amount of life insurance you’d need to fund a buy-sell arrangement. A valuation protects your family’s interest in a dispute with surviving shareholders, or it can simplify a difficult process as your family makes plans to sell the business.

Incentivizing key employees: If you have an essential manager (or entire management team) you want to reward with a share in the business, a valuation creates an objective baseline.

In the end, a valuation provides realistic, market-relevant information so you can make better informed decisions. An objective, third-party valuation helps ensure all parties are on the same page and provides you with an educational benchmarking tool you can use to build future value.