QUESTION: One of my former business partners recently told me I need to be more realistic about my business value. How do I determine how much I'll get when I sell my business?
ANSWER: There are several variables to consider when determining the value of your business. For most entrepreneurs, the transfer of your business is one of the most important financial events of your life, so you need to have an accurate idea of what it's worth. Knowing what your business is valued at today will allow you to appropriately measure whether you are on track to meet your financial goals in the future.
There are several benefits to having an accurate value of your business. It will give you an objective perspective of how much additional value you must add to the business. It will allow you to monitor your progress toward your financial goals, including when you can leave your business. It enables you to have a basis for estimating, and minimizing, potential tax consequences. And, it also gives you time to implement strategies to help grow the value of your business if necessary.
There is no simple answer for how to place a dollar value on your business. This is why determining value is such a complex process. It can depend on a number of factors, like how long you've been in business; profitability and cash flow; debt; the nature of your business and its products or services; the amount and condition of your equipment; supplies and inventory, the type of customers you have, etc. In addition to the internal factors, there are external factors that can effect a business valuation, too. These include the economy, the stability or instability of the stock market, interest rates, industry trends and competition, and political considerations to name a few. Because many of these factors constantly fluctuate, they might impact the value of your business.
That's why it's important to engage a professional who can give an accurate and unbiased opinion of value. Ideally, you will want to work with a business valuation analyst who has expertise in accounting, taxation and economics as well as the practical experience and business acumen needed to identify issues at the industry-specific level and evaluate subjective factors that drive business value.
In addition to gaining a better understanding of what your company is worth, a valuation of your business can serve as a powerful benchmarking tool that can help measure your personal and professional objectives. Accurate valuations are also beneficial for banking and insurance needs as well as generational transfers and unexpected events like death, partnership dissolutions, etc. Business owners who put off getting a business valuation until an unexpected event occurs generally end up with an outcome that isn't as beneficial as it could have been. This is why it's important to treat the act of valuing your business as an integral part of running it. Ultimately, understanding the key elements of your business' value provides you with insight on how to operate the business with an emphasis on profitability while you continue to maintain and increase its overall value.
Once you have determined a baseline value, you can determine whether any potential gaps exist in achieving your overall retirement goals. If so, you need to work with your business advisers to develop a strategy and timeline that will help you close the gap. It is then important to review and measure the performance of your business relative to your baseline value and determine your progress so you can adjust if needed.
Whether you are considering a sale or other transition or just want to have a better idea for future planning needs, it's good to know what your business is worth. You can then take steps to increase the value of your business so that you can maximize your after-tax proceeds on an ultimate sale. The bottom line is that you must be sure that you can sell your company at a price that will generate enough cash flow after tax to maintain the lifestyle that you desire.
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For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.
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