Why Do I Need To Have My Business Valued?

This is a question I get all the time. It's funny when you think about it. Most people have a good sense for the value of their house or car, but when business owners are asked the question, "What's your business worth?" the overwhelming majority answer, "I don't know."

Is this a product of carefree business owners with no desire to increase the value of their businesses? Usually, it is the result of small business owners focusing on more immediate needs such as responding to customer demands, making payroll, working through employee issues, and more. With all of this going on, who has time for a valuation?

A valuation is an important planning tool for any business owner, and the process is relatively quick and painless. At some point, all small business owners will be faced with a situation where a valuation is required. The following are examples of such situations.

Buy-Sell Or Cross-Purchase Agreements. These agreements are used whenever there is more than one shareholder for a business. Their purpose is to direct the transfer of shares from one owner to the other in the case of unforeseen events (such as death, disability, departure). It is important to have these agreements as detailed as possible when they are set up to avoid potential future conflicts. The details should include a valuation for the business.

Succession Planning. In identifying who is the most likely buyer between a partner, family members, employees or a third party, it is important to understand what the company is worth and how and why that value can be different for each of the parties. It is difficult to have a fruitful discussion about the potential buyout of the current owners without first having an idea of what the company is worth.

Sale Of The Business. You wouldn't put your car up for sale without having an idea of what you might get for it. Why would you approach the potential sale of your business any differently?

Estate Planning. In order to put together a plan to transfer wealth from one generation to the next in the most tax-efficient manner, a financial planner will need to understand your personal balance sheet (for example, your personal assets and liabilities). For many small business owners, their company is their largest single asset.

Borrowing Money Or Issuing Stock. Financial institutions and potential investors will want to understand what the company is worth before investing the capital. An owner who can provide an independent third-party valuation will be in a much stronger position to negotiate with lenders or potential investors than owners who cannot.

Strategic Planning. Part of any strategic plan for a business is to either maintain or increase the value of the company. In order for that to happen, a business owner needs to understand what the company is currently worth and the key drivers for increasing that value.

Many business owners procrastinate, not having a valuation performed until they are "ready" to get out of the business. Unfortunately, in many cases, what the owner believes the company is worth does not match up with what a potential buyer is willing to pay. Inevitably, the owner either continues with the business longer than expected in order to increase the value or sells the business without realizing full value. It's never too early to start planning.

— Precision Machined Products Association