There is no shortage of new ideas and books each year on how to best manage your business. Most of these business management books are providing ideas which will ultimately (hopefully!) result in increasing the value of your business as an investment. In actuality, when done thoroughly, the business valuation process encompasses an analysis and discussion that identifies and offers ways to increase each of the quantitative and qualitative drivers of value.
Some business owners are surprised to learn that a professional business valuation’s benefits go far beyond the conclusion of value itself. The valuation process covers much of what is talked about in various business management books but offers one important advantage…the concepts are applied directly to understanding and increasing the value in your unique business. If you own your business, there may be no better business advice than to make sure you know the current value of your business.
Whatever your strategic goals and tactics are for 2023, not knowing the value of your business is like driving a car without the steering wheel. Beyond knowing whether your business was profitable last year, you would be wise to know whether your day-to-day operating decisions resulted in increased value. Or, if value is not increasing, why not?
So, what is the power of knowing the value of your business?
Many owners mistakenly believe a valuation is not urgently needed at this time because they are not considering selling their business in the near future. Or, their transition plan is to pass the business along to family and erroneously don’t consider this an actual “sale.”
Actually, rather than thinking about “Is your business for sale?” it might well be worth asking “Is your business ready for sale?” What does that look like? It looks like a business whose owner(s), through prior business valuations, has identified the levers of value and has actively been working to increase value based on that understanding. This positions owners to respond, not react, when an unexpected sale opportunity arises. It is important to remember that the value of any business can be increased, but it requires focus over time.
Every business will transition ownership at some point due to ordinary events or one of life’s surprises, including significant health events, burnout, or receiving an unsolicited offer. Having a business that is ready for sale puts the owner in the driver’s seat for achieving the best economic outcome. The nature of owning and managing a privately owned business keeps most owners busy solving today’s issues with little time to think about “is my business ready for sale?”
Here are examples of the benefits or power of always knowing the current value of the business and having it ready for sale no matter your age or circumstances.
- 1. All business owners would agree there is a price that would motivate them to sell their business—whether they are 35 years old or 65 years old. But what is that price? Today we hear of a plethora of business owners receiving letters or contacts from interested buyers. How would you evaluate and/or negotiate such offers without having your business ready for sale, i.e., what’s the current value of your business?
- 2. As you work with your financial advisor to decide if you can buy that cabin, condo or boat, pay for your children’s college, or retire, how do you arrive at any meaningful financial plan without knowing the value of what is most likely your most valuable asset - your business? Most every financial plan for a business owner relies heavily, if not solely, on the number entered into the plan for the value of the business.
- 3. If the business has more than one owner, we would hope you have a dynamic buy/sell or other owners’ agreement that defines how the owners will go about separating from the business. There are six triggering events that cause an owner to leave a business: death, disability, quitting, retiring, being laid off, or being fired. The agreement should speak to each of these triggering events and reflect valuation provisions instructing the appraiser how to go about valuing the business. This is the best insurance policy owners of a business could have—assurance that the agreement will work when needed—because it WILL be needed. And speaking of insurance, how is life insurance purchased without knowing how much is needed to cover the buy-out of the business interest portion of the deceased owner’s estate?
- 4. Circling back to business management advice—knowing the value of your business enables you to identify the key drivers of value, be aware of the levers, or factors, that increase value, and know if your management decisions result in higher value, which is - or should be - the ultimate goal.
Business owners nationwide are receiving their year-end financials and the key areas of focus tend to be “is the business growing its sales?” and “is the business profitable?” But did you know that a business can increase its sales and profits without increasing value? So are the owner’s management decisions and hard work paying off in terms of increasing value? It's hard to tell unless the business is valued by an accredited business appraiser so the trends in value can be compared year-to-year.
A business valuation encompasses ALL the components that drive value and enables the owner(s) to keep their finger on the pulse of whether their largest investment is increasing in value. While our team loves to read, we guarantee you will learn far more about managing your business from a business valuation than you would from reading a shelf load of business management books.
Ultimately, no matter your age or years in business, the key is to always have your business ready for sale.
As always, our team is here to answer questions you may have around business valuation for privately held businesses. We are happy to have a complimentary initial conversation to discuss what the valuation process entails and how to get started. CapVal offers traditional comprehensive business valuation options as well as our Business Trend Analysis + Valuation (BTA+V) web-based software that allows you to obtain a reliable value conclusion for business planning purposes at your desk, on your schedule.
If you would like to discuss a specific business situation please reach out to us through the Contact page or call us at 608-257-2757 and we’ll connect you to a business valuation expert on our team.