Disclaimer – Opinions expressed are solely my own and do not express the views or opinions of my employer.
The majority of closely-held business owners I meet typically fall in 2 camps when asked what their business is worth. The first group falls in the ‘I don’t know’ camp due to a variety of reasons including: having never been approached to sell their business, never needed to attract outside capital, still happily married, etc. The other camp is what I call the ‘pie in the sky’ where the business owner has a number they would accept to sell their business, but often this number is not necessarily based on any financial analysis and in many cases much reality.
Having a business valuation performed will solve a number of issues including:
1. It sets a benchmark from which to compare if your strategy is translating into value. Is the efforts you’re putting forth falling to the bottom line and ultimately on the back end in true business value;
2. It gives you a good starting point from which to negotiate a sale of the business whether it’s true exit planning or succession planning internally;
3. If someone has made an offer to purchase your business, it permits you to determine the reasonableness of the offer;
4. For companies on the earlier stage of development, this can assist in attracting outside investors by having an independent, third-party approach the subject of valuation as opposed to handling this internally where one may view the conclusions as being biased;
5. Understanding proper business value will permit you to purchase the proper amount of insurance coverage whether it be key man insurance on your other partners or to fund as part of your buy-sell agreement in case one of your partners suffers a disability, premature death or other cause rendering your partner no longer capable and leaving you with needing to pay their heirs