There’s a hard truth about business valuation in general: Most business owners have no idea what a buyer would pay for their business.
A business valuation is something that many business owners think of as unnecessary unless and until the time comes to sell. But a business valuation can be a useful tool for both short and long-term business planning. It can even be the dose of reality that influences you to make decisions about your business that you’ve put off too long.
I’ve met several forward thinking owners who regularly have their business valued as part of the annual business review process with their partners and family. Here are three more good reasons to get a business valuation:
1. Business planning
A lot of business owners tend to get fixated on growth, the pursuit of which often revolves around KPI’s like sales revenue or gross margins. But growth does not guarantee profitability, nor does it automatically increase the value of your business.
Going through the process of having your business valued can be an eye-opening experience. It teaches you to look at your business the way a buyer would, and uncovers what it is about your business that either drives its value up, or brings it down.
2. Retirement planning
Business owners take a lot of risk by having much of their net worth — typically more than half— invested in one asset: their business. These same owners may also expect to fund all or part of their retirement with the proceeds from the sale of their business.
Imagine your disappointment if you thought your business was worth $2 million dollars, only to find it’s worth half that amount when the time comes to sell and retire. When it comes to retirement, your personal goals may be the first thing you consider. The next should be what your business is worth, and how that amount will — or will not — support your underlying goals for yourself and your business when you’re no longer at the helm.
3. Buy/Sell agreements
If you’re in business with a partner and haven’t had your lawyer or accountant draw up a Partnership Agreement (Buy/Sell Agreement) then you need to do so. Immediately! A Buy/Sell Agreement is the equivalent of a will for business owners, and specifies what would happen to the business in the event that some unforeseen disaster befalls one of the partners. Part of this exercise is for you and your partners to agree on what the business is worth. Rather than make your best guess, this is the perfect time to get an opinion of value from a professional.
The type of business valuation you need will depend on the reason. One business can have many different values depending on who’s asking and why. If you need a sworn valuation, expect to pay at least $5,000 to $8,000. For many business owners, a non-certified opinion of market value from an AIBB valuer (such as GMO’s Graham O’Hehir) can be both affordable at around $3,900 as well as entirely adequate for making internal decisions.
It’s one thing to know the size of a company, but it’s another to know what it’s worth. If you’re unsure about the value of your largest asset, it may be time to find out by talking to GMO.
Graham O’Hehir GMO Managing Director