As a small business owner, one of your most important assets is your business. It not only provides a living, but also independence, a degree of financial security, and potentially your future retirement. Often it is more valuable than your personal residence. We hear about value on a daily basis. “Home values are decreasing”, “How to increase the value of your retirement funds,” “Creating value while cutting costs,” etc. But have you considered the value of your small business? What is IT worth? While it is a huge investment of your time, energy, and money, it isn’t an investment you can check the value of by logging into your bank account.
So how does one obtain the value of their company? Every business owner should have an up-to-date valuation provided by a professional valuation firm. We at Peak Business Valuation are happy to help. You should consider having it done on a regular basis – we suggest annually. There are a variety of reasons to know the value of your business. We will discuss just a few of them here. It will not only help you gain insight into growing your business but help align your business strategy for success.
1. Planning for Growth
A valuation report is a great benchmark for comparing annual growth. It identifies key drivers of growth as well as areas for improvement. It also identifies things that are having a negative impact on your business. A valuation will enable you to make better-informed decisions for your business. Using the valuation, you can then develop a strategic plan to increase growth and improve business value.
2. Preparing to Sale
One of the most important reasons for a valuation is to know how much the business could sell for. Knowing the value can also assist in price negotiations and help weed out offers that value the company at a deep discount.
3. Attracting Investors
An up-to-date valuation is like a resume for potential investors. It details your business history and is a snapshot of your business performance in the current economy. If you are seeking investors, a valuation report can be extremely helpful. Investors use a business valuation to determine their potential return on investment and if the company is fairly-valued at that time.
4. Obtaining Funding
Many lenders require a business valuation in order to obtain funding for your business. They will often require it in the underwriting process and the fee is bundled into your closing costs. This is the case with SBA 7(a) loans. The reason being is that lenders require further support prior to providing capital.
5. Anticipating Retirement
Many small business owners hope to retire with the nest egg they obtain from their business. If you’re basing your retirement on the eventual sale of your business, you need to be prepared. A business valuation will give you an in-depth understanding of how much your business is worth now. You can then identify how much you need to generate from the sale of your business to retire comfortably. Once you know what the gap is, you can put in place a strategy to increase your business value and ultimately achieve financial freedom.
6. Implementing an Exit Strategy
Every business should have an exit strategy that aligns with the owner’s business and personal goals. Taking the time now to plan your exit strategy will contribute to greater success in the future. A valuation can give a starting point for your exit strategy. Businesses should start thinking about their exit strategy today and begin implementing it with the knowledge that they will be exiting sometime in the future.
Business owners should always be striving to create value in their business. When an owner is facing the question as to whether or not value is being created or inhibited, it is important to seek the advice of a business valuation professional to determine the on-going value of their investment. This process can provide benefits that are far greater than the nominal cost.
I hope these tips have helped you in your search to build, grow and eventually sell your business. Understanding the value of your business is important, regardless of any near future transactions. The first step in that process is a business valuation, which we are happy to provide you with. We can also help to identify ways to increase the value of your business through an evaluation.