As business owners, we often have a thought in the back of our minds: What is My Business Worth? When you first started out, you likely were less concerned with the value of your business if you needed to sell it. If you were taking on investors, you had initial valuations done or some other information as to what those investors believed your business is worth. But now that you've been in business for some time, it's a good time to think about what happens next. Even if you aren't looking to sell your business right away, it's a good time to think about what it would be worth when it's time for you to move on from the business. It's one of the interesting intersections of my practice, between estate planning and business law, and it's an important part of your business toolkit that many business owners neglect.
If you are more visually inclined, you can also check out a short video about the importance of estate planning for business owners.
Approaches to Valuing a Business
You can have a variety of reasons why you'd like to have your business valued. In addition to planning for the future, you may also need a valuation so you can qualify for a loan (but watch out for personal guarantees). There are a number of ways to have your business valued, but there are three common approaches that I run into when working with clients.
- Assets ~ this technique values all of the assets (both tangible and intangible) of your business. It does not factor in the future earning potential of the business, so that great next product that you are considering launching won't help you out. This is normally used for companies that are either bankrupt or looking to sell off their assets.
- Earnings ~ this technique tries to factor in your compensation and related expenses when examining the earnings of the business to get to a value of the business. Using a "multiplier" that is highly dependent on the type of business and your industry, it focuses on the earnings of your business.
- Market ~ this technique is common, but can also be challenging as it seeks to use recent sales of similar companies to assess the value of your company. In these valuations, I often hear from my clients that they are not really comparable to the businesses being used in the market approach, but as unique as you think your business is, there often is some type of comparable that can be used.
Although these are the main three approaches, it's not necessarily set in stone. There can be many factors that can adjust the value of your business. If someone is only seeking to purchase a minority interest in your company, that lack of control can come at a discount of the overall price of the company. You will also need to factor in the prospects for the business in the future, what industry are you in and what is the long-term outlook for that industry.
What's The True Value? It's what someone is willing to pay for your business. In the end, you can be valued at a completely different number than what someone will actually pay for your company.
This isn't a foray into the world of valuation that you should take lightly. I recommend that you speak with tax, financial and legal professionals to help guide you through the process of valuing your business.
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Not sure where to get started? Or maybe you are already on the path and need some professional guidance? Let's set up a Legal Strategy Session to discuss the best next steps for you and your business.