Worth it | Treat your business like any other investment - know its value
Over the years, I have often suggested to business owners that they know what their business is worth. Consistently, however, I find that business owners do not have a clue as to the value they have created with their enterprises, which could result in a lifetime of work and achievement never realizing its potential. As business owners, we do more than go to work each day. We do more than meet payroll. We do more than work 10 or 12 hours a day. As business owners, we create value.
I was surprised the first time my wife and I retained a business evaluator and he presented us with his calculation of our business’ worth. I remember asking, “Are you sure our business is worth this much? Do you seriously think someone would pay us that much?” But the fact is, someone did pay us that much. More importantly, I came to realize that the business we had created was worth every penny of the purchase price.
We all remember how much we paid for our home and most of us also have a good idea as to its current market value. In most cases, the value of our home pales in comparison to what our business is worth. Yet we never take the time to determine our business’ value. We know what we paid for other investments like stocks and bonds and we track these investments every day to see if they’re growing. Our businesses, however, where we spend the majority of our days and spend the energy of our lives, are rarely considered to be investments.
Knowledge is power
It doesn’t matter whether you plan to sell your business — understanding its value could have a significant impact on the well-being of you and your family. Who is to say what your health will be a year from now? Could a divorce be possible? Is there a chance your partnership will break up? Could your offspring decide they aren’t interested in taking over after all? Then there’s the other side of the coin. What if an intriguing merger or acquisition opportunity presents itself? Understanding the value of your business could play an important role in growing your company through a merger or acquisition and in securing necessary funding.
Knowing the value of your business is also important for estate planning. You cannot plan your retirement without determining what your business will provide for you. Your bank and almost anyone you owe money to will want to know what your business is worth. Most importantly, you should want to know.
Understanding what brings value to your business can also guide you in the day-to-day management of your company. If you approach every business decision by questioning whether it will improve the overall value of the company, you will probably make better decisions.
All of us small business folks have had days or weeks or even months when we just wanted to lock the doors and not come back. Many business owners find that understanding the equity being built in their business improves their outlook. It provides a whole new reason to come back the next day and get to work with renewed enthusiasm.
Act now
There are many books and software programs available to help determine business value. It’s far more beneficial, however, to have someone outside of your business perform the valuation. That way, your emotional attachment to the business can be eliminated from the valuation formula. There are many accountants, business brokers and merger and acquisition professionals who can help you estimate the market value of your enterprise.
You can also see comparable values by visiting some of the larger transaction websites. Search www.bizbuysell.com, www.bizquest.com or www.mergernetwork.com, and you will likely find businesses similar to yours being marketed for sale. These listings will give you some idea of how companies like yours have been valued. Of course, consider such portals as providing only a broad value range — nothing can replace a valuation performed exclusively for your business.
We all need rewards in life. Your greatest reward as a business owner could come the day you exit the business on your own terms. That won’t happen unless you understand what your hard work and risk-taking has built. Of all the ways you can maximize cash for yourself and your business, understanding and building value will have the greatest return. Not planning for that eventual “cash out” could result in squandering a significant portion of your future financial security.
Understanding and building business value will help you, your employees and help grow your business. Don’t put it off.
Stephen Vlachos, principal at Caswell Vlachos Group LLC, a business brokerage firm in Portland, is a serial entrepreneur and business consultant. He can be reached at svlachos@caswellvlachos.com. Read more On Your Own here.
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