Do You Know the Value of Your Business?
May 17, 2022
As a business owner, you may be so busy running your business that you haven’t taken the time to determine what it is worth. However, even if you don’t plan to sell in the near-term, there are reasons to keep up to date on its current market valuation.
Knowing what your business is worth can help you:
- Make informed, strategic decisions about growing and protecting your business. Taking the time to figure out what makes your business valuable will help you prioritize the aspects that make it attractive to potential buyers. In addition, a current valuation establishes a benchmark from which to measure progress and allows you to set achievable goals for the future – for example, what you want the valuation to be when you retire. A current valuation also helps you figure out how much insurance coverage you need to protect your business and livelihood should something happen to you or other key executives, or your business experiences other potential risks, such as a workplace accident.
- Prepare for retirement and other life events. For many business owners, their business comprises a significant portion of their wealth. If you’re planning to leverage the assets you have in the business to fund your retirement, you need to know what it is worth as part of your wealth planning. In addition, life’s twists and turns may alter your plans and you may decide to sell sooner than expected. And should you get married, remarried, or divorced, knowing the value of your business will help you plan.
- Leave your legacy. If you are hoping the next generation will take over your business someday, knowing its worth will help you appropriately structure your estate plan. This is especially important if some of your loved ones do not want to be part of the business. An accurate business valuation can help you achieve your legacy goals and structure the business transition.
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Assessing the value of your business
There are different ways to estimate a business’ value, including your:
- Cash flow, which measures the inflows and outflows your business generates and can be done in different ways.
- EBIDA, your earnings before interest, taxes, depreciation, and amortization to yield your net cash flow
- SDE, or the seller’s discretionary earnings, another measure of cash flow that takes into account the owner’s compensation, discretionary expenses, depreciation, amortization, and extraordinary expenses
- Asset valuation, which totals the worth of your:
- Tangible assets, such as equipment and property
- Intangible assets (for example, your reputation, goodwill, and trademarks)
However, if you plan to gift or sell to family members as part of a succession plan, or you’re in a partnership and plan to transition just a portion of the business, a buy-sell agreement may be more appropriate. In this case, the methodology for assessing the business’ value may be based on other factors or require an independent appraisal.
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