Knowing what the business is worth is of moderate importance to business owners we surveyed* – with just over half saying they’ve had their business valued in the last three years. However, it is considered a relatively high priority – with over half saying they frequently or often think about their business value.
The reasons given for wanting to know the value tend to focus more on measures of financial health rather than as a means of protecting the business or funding retirement. Many business owners also stated they would only need a valuation done when they are getting ready to sell.
Business owners are confident they know who the right resources are to solve this issue. Most say they would turn to their CPAs as the go-to-person followed by a financial professional. But here’s the problem: one-third of those who claim to have done a business valuation in the last three years say they did it on their own.
A proper business valuation is not a “rule of thumb” or a figure agreed to with a handshake; it’s thoughtfully crafted by a credentialed appraiser after thorough research and is documented in writing. Be sure that any firm or individual you hire to value your business has the proper credentials, such as: Certified Valuation Analyst (CVA), Accredited Senior Appraiser (ASA), or Accredited in Business Valuation (ABV).
There are critical times in the life cycle of a business when it is important to have an accurate valuation. In addition to measuring business health and preparing it for sale, here are other times when you may want to consider knowing what your business is worth.
Funding a buy-sell agreement
If you are obligated to buy out your partner, or his/her spouse, through a buy-sell agreement, you need to agree on a value that everyone (both the buyers and the sellers) is comfortable with ahead of time and have it in writing in the agreement.
Retirement income planning
Your business is most likely your largest asset and a key component of your retirement plan. A valuation can help you reconcile your future retirement income needs with the current value of your business to help identify any shortfall.
Estate tax planning
The Federal Estate Tax exemption has helped to make estate taxes less of an issue. But for some, planning for a potential tax burden and the impact it could have on the next generation is critical for the long-term success of the business.
* 2015 MassMutual Business Owner Perspectives Study conducted by HawkPartners for MassMutual.