Many small business owners don’t know how much their enterprise is worth, a practice that can be 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.
“People whose home is their primary asset want to know what it’s worth. If you open a brokerage account, you want to know what it’s worth. You would never give your money to a financial advisor who told you to ‘trust them. as they invest it and never report back to you on its value,” said Travis W. Harms, who heads Mercer Capital’s family business advisory services group. “Just because your business isn’t liquid assets , doesn’t mean it’s not real wealth.”
Here are five points to help entrepreneurs understand the importance of business valuation.
Valuation is critical to running a business and selling it
Many business owners may be too overwhelmed with day-to-day operations to focus on evaluating their company. Others don’t want to spend the money or simply don’t understand the importance of having an objective third-party measure of its value.
An assessment, however, can be critical for many reasons. These include an imminent sale, the issuance of stock options, succession planning, tax and estate planning, raising capital, executing a buy-sell agreement, insurance needs or to obtain business funding, said Robert King, partner in the investment banking team in Crewe. .
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 rate the business is as a checkpoint so partners are all on the same page. Even if there is a buy-sell agreement, there may be disagreements over how to value a business for separation purposes. Having realistic expectations for the business down the road can prevent a protracted and messy fight over the company’s value if the time comes for the owners to part ways, Harms said.
Knowing the up-to-date value of your business is also important because many owners don’t plan to sell their business until a suitor comes knocking, said Brett Dearing, partner and exit planning specialist at wealth management firm Cerity Partners. If you don’t have a current estimate, you will be at a disadvantage from a negotiating standpoint. You can either have an overly rosy outlook on your business, or conversely, grossly underestimate its potential.
“Many business owners don’t understand the value of their business before they sit down with a buyer at the negotiating table,” Dearing said.
Certified experts exist to evaluate your business
One of the best ways to find an expert to evaluate your business is through one of three credentialing bodies.
The Accredited Credential in Business Valuation 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 valuation certificate from the American Society of Appraisers. And the National Association of Certified Appraisers and Analysts offers the Certified Appraisal Analyst designation.
While having just one of these certifications does not guarantee the quality of an appraiser, it should be your basic starting point given the level of expertise these designations require, business appraisal professionals said.
The cost of calculating an estimate will vary
There is no single answer to the cost question because it depends largely on the size and complexity of the business, the scope of work required and the purpose and intended use of the assessment, Harms said.
Given these parameters, an appraisal can cost anywhere from about $5,000 to about $50,000, according to appraisal professionals. Be sure to be specific with the appraiser about why you are seeking an appraisal so they can provide what you are looking for.
Some of the assumptions that go into an appraisal for estate planning purposes or issuing equity compensation can be completely different than for raising capital or selling a business, King said. “One size does not fit all,” he said.
Business owners should regularly update this asset value
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 are trying to grow your business. M&T Bank offers a free digital platform that allows businesses to model how different outcomes would affect their valuation. It’s not an accredited rating, but the service provides a baseline before you take the next step, said Jonathan Kolozsvary, director of new ventures at M&T Bank.
Regular business assessment can help you identify weak points and make improvements. “If you go through the appraisal process and the value isn’t quite where you want it to be, you can improve the appraisal based on the areas identified,” said Tami M. Bolder, principal at CBIZ Valuation Group. “It’s also useful for general planning purposes,” she said.