I am a 56-year-old owner of a 2nd generation manufacturing business. I have read about people getting business valuations and I’m interested to understand why I should look at doing this?
Thank you for your question! Some people are forced to have their business valued due to the death of a business owner, a divorce or a dispute between business owners. However, in recent years, savvy business owners are increasingly looking at understanding the value of their business as a proactive step to thinking about their business as an investment, not just their job or career.
Business owners actually wear two hats—they are both an employee of their business and also an investor in that same business. Learning to manage the business as an investment is critical and to do this, one needs to know the value of their business and whether that value is increasing or decreasing over time.
Here’s a question that most people can relate to -- would you invest in a 401(k) or IRA and never check on its actual performance numbers for 20+ years? The answer is probably no, and ironically your business is typically your most valuable asset, much larger than your 401k or IRA. Having your business valued certainly tells you what it is worth today but also uncovers ways to increase value in your business.
The problem we see most often is that business owners think their business is worth more than it actually is. This happens for many reasons, from sentimental attachment to a family business not matching actual market value, to assuming revenue or a multiple of earnings is an accurate representation of value. We also see business owners who have received advice from a financial planner as to the amount the owner needs to retire comfortably and the business owner assumes this figure as the value of the business. Unfortunately, these two numbers are completely unrelated. Once you know the actual value of your business it is certainly possible to increase value, but this typically takes time.
Whether you plan to sell your business in the coming years or pass the business on to the next generation, you need to know what your investment is worth and how that changes over time. We advise business owners to update their valuations at least every 2-3 years as the business model has typically changed by then. Having accurate information aids in making informed business decisions – both short term and long term – and provides realistic data for personal retirement planning. Plus, you never know when opportunity may knock and you may want to sell your business and retire early!
Please feel free to reach out to me with any additional questions.
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