Does the following scenario sound familiar?
Once a year you get a statement in the mail. You eagerly anticipate its arrival. The contents of this envelope will tell you if your biggest investment — your business — has increased in value over the past twelve months. The bulk of your net worth is tied up in the equity you’re building in your business, so you rely on this annual valuation report to help you manage your company, plan for retirement, and sleep at night. You can’t wait to open it!
No? You’re not alone.
Most of us have grown accustomed to receiving quarterly statements from the people who manage our liquid wealth (stocks, bonds, mutual funds). We’re also used to paying those people — typically one to three percent of the value of our assets — to manage our liquid wealth.
If you own a business, however, chances are the majority of your net worth is tied up in an illiquid asset — namely the equity you’re building in your business. Yet most business owners have no idea what their business is worth.
“The rate of return on your private company investment is an important determinant of your overall portfolio return and, ultimately, the wealth available for retirement and other personal goals. It pays to pay attention.” — Chris Mercer, Unlocking Private Company Wealth
Following are just a few reasons why 1Q is the perfect time for a business valuation:
Your financials are up-to-date
If your fiscal year ends on the calendar year, then 1Q typically involves closing out last year’s books. And for better or worse, the value of your business is often heavily influenced by how it performed in the last fiscal year. When a buyer says they will pay a certain multiple (let’s say 4.5) of earnings (let’s say EBITDA) for a business, that usually means EBITDA for the last fiscal year.
Regardless of exceptions to this rule — like basing value on a three-year average, or trailing 12 months — last year’s financial performance will have a big impact on the current value of your business.
After you get last year’s Income Statement and Balance Sheet finished up and ready to send to your accountant for tax purposes, why not go ahead and send that same information to a business broker, M&A advisor or valuation specialist to find out what your business is worth?
You’re in planning mode
You may not think of a business valuation report as a tool for strategic planning, but there are a number of ways it can inform both short and long-term business decisions. A few questions that a business valuation can help answer include:
- What are the primary drivers of value at my company?
- What characteristics are having a negative impact on business value?
- How difficult will it be to sell my business when the time comes?
- How would an investor view risk in my business?
- How do the margins at my business compare to industry averages?
- Do I need to update other contracts (e.g. life insurance, buy/sell agreement) based on the current value of my business?
- Does the value of my business support my long-term personal financial goals?
You have time to make changes
Most business owners ride the wave too long. They stick with the status quo at their business and address exit planning — including business valuation — at a point in time when it may be too late to influence the outcome.
If you get a business valuation done at the beginning of the year and discover some changes you’d like to make, or new goals you’d like to attain, you have the better part of 12 months to put them in place. If you run across larger issues that may take longer than a year to correct — like bringing on enough new accounts to reduce high customer concentration — the earlier you uncover these issues the better.
While it’s always smart to have an idea of what your business is worth, don’t underestimate how much you will learn about your business by simply going through the valuation process. Understanding how outsiders like business brokers, valuation specialists and buyers view your business can be a real eye opener. I’ve met few business owners who don’t want to change something about their business after having a valuation done.
There’s never a bad time to get a business valuation for your company, especially if you’ve never had one done before. A good valuation will not only give you a value range, it will give you a fresh perspective on the strengths and weaknesses in your business.
Don’t think of a business valuation as just a number. It is a discovery process that may prove to be invaluable.
Ready to find out what your business is worth? Contact us about our affordable business valuation services.
Author: Barbara Taylor
Barbara is co-founder of Allan Taylor & Co. and a former New York Times blogger. She has been a small-business owner since 2003. Barbara lives with her husband, Chris, and their two sons in Northwest Arkansas.