Key Things to Know for Valuing Your BusinessOctober 10, 2017
Alan Huberman, CPA, MST
According to the California Association of Business Brokers, retiring Baby Boomers are set to sell or bequeath more than $10 trillion worth of assets in the next two decades. A good amount of those assets are currently held in more than 12 million privately owned businesses, 70 percent of which will likely be sold or closed within the next five years.
All of that is to say: It’s never been more important for business owners to fully understand exactly how much their businesses are worth.
Here are a few things business owners need to understand in order to complete an accurate—and successful—valuation.
Your business only exists within its respective industry:
It should go without saying, but business owners should know everything there is to know about the industry they serve. Staying up to date with the latest best practices, technology and other factors will help you accurately determine the value of your company.
The most important value driver of your business is your management team:
Depending on the size of the business, the management team might consist of only one person. But, in order to increase value, business owners should consider building a team of employees with a wide variety of skills. Having a strong, talented, diverse leadership team will ensure the business will maintain its core competencies once the original owner departs.
Financial reporting should never be overlooked:
Third-party buyers will always do their due-diligence. They’ll look for any reasons to reduce the proposed price. Keeping organized, up-to-date documents and data is crucial to defending your business’s price tag.
Neither should non-financial data:
Businesses that track metrics specific to their industry are typically more valuable than those that don’t. Business process metrics, such as days on hand of inventory, defects rates, or backlog-to sales ratio, can provide prospective buyers with a better idea of the business’s strengths.
Growing top-line revenue is important. But so is reducing risk:
When trying to increase the overall value of their business, many owners focus primarily on growing their top-line revenue. This is, of course, an important part of the process; however, if the risk associated with the new cash flow is too high, the overall value of the business will suffer. Owners should consider reducing risk by increasing the depth of their management team, increasing efficiency and cutting day-to-day costs , or—in some cases—merging with a business operating in the same industry in order to further diversify their customer base.
In many cases, you’re only as good as your advisors:
Properly valuing your business is a complicated process. A committed team of professionals with expertise in business valuation can help put business owners in the best position to succeed.
Finally, the ultimate value of your business is what the buyer is willing to pay you:
In other words, business owners need to be reasonable throughout the valuation process. Do your best to build a strong, valuable business – and back your proposed price up with accurate, honest data.
How BlumShapiro Can Help
We provide a holistic planning approach that will help you make educated and well-informed decisions regarding your business, your family and your estate. We will work with all your professional advisors to ensure the coordination, planning and execution so that our clients achieve their personal and financial goals. Learn more >>