Most business owners don’t count their most valuable asset

Most business owners don’t count their most valuable asset

Many small business owners don’t know what their business is worth, a practice that can become a risky business.

A whopping 98% of small businesses surveyed by M&T Bank over the past two years did not know the value of their companies. This is especially concerning given that for most business owners, their company is their most valuable asset.

‚ÄúPeople whose home is their primary asset want to know what it’s worth. If you’re opening a brokerage account, you want to know how much it costs. You would never give your money to a financial advisor who told you to trust them. while they invest it and never tell you what it’s worth,” says Travis W. Harms, who heads Mercer Capital’s family business advisory services group. “Just because your business isn’t liquid wealth doesn’t mean it isn’t real wealth.”

Here are five points to help entrepreneurs understand the importance of business valuation.

Valuation is essential to running a business and selling it

Many business owners may be too overwhelmed with day-to-day operations to focus on valuing their company. Others don’t want to spend the money or simply don’t realize the importance of an objective third-party measure of its value.

Evaluation, however, can be important for many reasons. These include impending sales, issuing stock options, succession planning, tax and estate planning, raising capital, executing a purchase agreement, insurance needs or obtaining business financing, says Robert King, a partner in Crewe’s investment banking team. .

Say, for example, you want to gift company shares to a family member. Understanding company valuation is important for tax and estate planning purposes. Another reason to value business is as a checkpoint so partners are all on the same page. Even if there is a sale and purchase agreement, disputes may arise about how the business is valued for division purposes. Having realistic expectations for the business along the way can prevent a long and messy battle over the value of the company if the time comes for the owners to part ways, Harms said.

Knowing the current value of your business is also important because many owners don’t plan to sell their business until a suitor comes knocking, says Brett Deering, a partner and exit planning specialist at wealth management firm Cerity Partners. If you don’t have a current appraisal, you will be at a disadvantage in negotiations. You can either have an overly rosy view of your business or, on the contrary, grossly underestimate its potential.

“Many entrepreneurs don’t understand the value of their business before they sit down at the negotiating table with a buyer,” Deering said.

Certified experts are available to evaluate your business

One of the best ways to find an expert to evaluate your business is through one of three accreditation bodies.

The Accredited Business Valuation credential is awarded by the American Institute of Certified Public Accountants to CPAs and qualified valuation professionals who meet the requirements. There is also a business appraisal certification from the American Society of Appraisers. And the National Association of Certified Appraisers and Analysts offers the Certified Valuation Analyst designation.

While one of these certifications alone doesn’t guarantee the quality of an appraiser, it should be your starting point given the level of expertise in these appointments, business valuation experts say.

The cost of the assessment calculation will vary

There is no single answer to the question of cost, as it depends heavily on the size and complexity of the business, the scope of work required, and the purpose and intended use of the appraisal, Harms said.

Given these parameters, an appraisal can cost anywhere from about $5,000 to $50,000, according to appraisal professionals. Be sure to be specific with the appraiser about the reasons you are seeking an appraisal so they can deliver what you are asking for.

Some of the assumptions that go into evaluating an issuance for estate planning purposes or equity compensation can be decidedly different than for raising capital or selling a business, King said. “One size does not fit all,” he said.

Business owners should update the value of this asset regularly

Depending on what you need the appraisal for, it may be something you do annually or every few years.

It can also be done more often as you try to grow your business. M&T Bank offers a free digital platform that allows businesses to model how different outcomes will affect their valuation. It’s not an accredited assessment, but the service offers a starting point before taking the next step, said Jonathan Kolozvari, director of new ventures at M&T Bank.

A regular business assessment can help you identify weak points and make improvements. “If you’re going through the assessment process and the value isn’t quite where you want it to be, you can improve the assessment based on the areas you find,” said Tami M. Boulder, director of CBIZ Valuation Group. “It’s also useful for general planning purposes,” he said.

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