If asked, most business owners would probably say that it’s their goal to sell or transfer their business in order to fund their retirement. And the first question they have is: “How much is my business worth?” They may have a vague idea of what they think it should be worth, but often don’t have any tangible numbers to base it on. More often than not, their estimations are unrealistically high in comparison to what a buyer would actually pay.
This disconnect is very common. In reality, most owners don’t understand the value of their business or how much money they will need for retirement. And, many are unsure about the steps they need to take to increase business value in order to fund the next stage of their lives.
Why Increasing Business Value Matters
It is not unusual for owners to have 70% to 90% of their net worth tied up in their private company ownership, which makes them highly dependent on the sale of the business to provide the cash they need for retirement. In addition, many owners will have to boost the value of their businesses before they transition or they will not net enough money, after taxes and fees, to fund their retirement.
Let’s look at what constitutes business value, how owners can increase their value, and how they can determine what their business is worth today.
How Businesses Are Valued
Determining business value is not an exact science. There are various methods of calculating value, depending on specific circumstances. For the sale of a business, value is based primarily on the promise of future cash flow for the prospective buyer, regardless of whether the business is sold to an internal or external party.
Buyers want to purchase businesses that generate cash so they may receive a return on their investment. Value will be impacted by the size and industry of the business, its growth potential, risk profile, and quality.
Determining the Value of your Business
- Certified Business Appraisals:
- Prepared by a reputable business appraiser (could cost up to $15K or more)
- Not required prior to selling your company, but can be an eye-opener at any time
- Required for all Gifting, Estate Planning, implementing ESOPs, Shareholder agreements, divorces, etc.
- Ball Park Range of Values:
- Typically done by a CPA , business broker or advisor as an informal estimate of value
Should be done prior to, or at, the same time as the creation of a business owner’s exit plan to estimate current value and determine strategies to increase value and bridge the owner’s Wealth Gap.
Owners generally will need a certified business appraisal ($10,000 to $15,000 cost) for gifting, estate or tax planning, divorce, or implementing an Employee Stock Ownership Plan (ESOP). For other planning purposes, you can obtain a cost-effective and simple estimate of value to understand what your business is worth and determine if you will net enough to fund your retirement goals. We urge all owners to obtain a baseline estimate of value so they can determine just how much they will need to grow in order to exit.
Buyers pay more for quality companies. If you work diligently to grow and improve your business, buyers will be willing to pay more for it. You may have only one shot at getting what you need from your business sale. Don’t take any chances. Join us to gain the knowledge you need to maximize your business value and secure your financial future.
Ready to find out what your business is worth? At Collective 54, we provide personalized guidance from a core group of trusted peers to navigate the challenges of preparing to exit your firm. You can vet decisions by an experienced peer group who will offer unbiased advice in a confidential environment to transition your business. Join Collective 54 to engage in a multi-channel program specifically designed to help members successfully transition their firms, through the integration of principles and practices of preparing for a successful exit.
Sources: BTA 2020, Streets of Wall, 2020