Over the next 10 years, 4.5 million businesses with over $10 trillion in value will need to transition to new hands. A major source of this shift is the retirement of baby boomers — 10,000 of whom turn 65 every single day. Knowing the value of a business ahead of time helps owners find the best buyer, ensure a smooth transition and fund a retirement that’s worth putting in all those years and hard work of building it.
But there are also many other reasons owners need to know the value of their business — some of which can be unexpected and leave owners or their families scrambling for a solution. The top nine reasons to know your business’s value are:
1. The Purchase and Sale of Your Business
There are many reasons business owners want to sell their business, outside of funding their retirement. In any of these cases, getting a third party to perform a fair market valuation can ease what is often a difficult process with a lot of back and forth between the buyer and seller on negotiating an agreeable price.
2. Succession Planning
No matter how old you are, it’s never too early to start your retirement and business transition planning. In fact, the earlier, the better. A full 78% of small business owners plan to sell their business to fund 60– 100% of their retirement, but less than 30% have a formalized succession plan. Overestimating or underestimating your business’s value can be detrimental to reaching your goals, so receiving a correct value of your business allows you to begin planning and helps ensure you meet your retirement needs.
3. Taxes and Government Regulations
Whether you’re giving to charity or going through bankruptcy, minimizing your tax burden involves knowing the correct value of your business.
4. Gifting and Estate Settlement
If you’re transferring your business to your children or other related parties, you’ll need to know its value for gifting and estate tax purposes.
The rate of divorce is actually growing for Americans over 50, but no matter how old you are, divorce presents a big risk if you’re a business owner. When it comes time to separate assets, knowing the value of your business is essential.
6. Shareholder Disputes or Buyouts
Shareholder disputes and buyouts are financial issues that require not only knowing the value of your business but also obtaining the help of a third party to appraise your company in a comprehensive, correct manner.
7. Financial Reporting
When a business is purchased, you may need a valuation for purchase price allocation. If a business has goodwill or other intangible value recorded on their financials, it may need to be tested for impairment. These are just two reasons why a valuation may be needed under Generally Accepted Accounting Principles (GAAP).
Compensation such as stock options or employee stock ownership plans (ESOP) offer a fantastic opportunity to not only attract and retain top talent but also find a convenient buyer for your business in your own employees. Of course, you’ll need to know the value of your business to implement these options.
9. Litigation and Contract Disputes
An example of how litigation or contract disputes requite a business valuation is in the value of lost profits. A business suffers a loss of profits when an act decreases its projected revenues, raises its projected expenses or both. If a vendor violates your contract or a competitor encroaches on your patented process, and your profits drop, knowing the value of your business will help determine how much in damages you can ask the court for.
Why You Shouldn’t Put Off Planning Any Longer
It’s not just knowing how much you need to retire comfortably that should drive your desire to plan ahead. Have you ever considered what would happen to your business if you were suddenly no longer able to run it? Or what it would mean for your family? Proper planning is crucial to ensure the best outcome in the case of an unexpected event. Planning also helps your management team or the next generation take over after your retirement (or in case of that unexpected event). When everything has been carefully considered and is in order, it helps ensure the longevity and further success of a business you worked so hard to build.
Many owners wait too long to value their business and historically have found they are unable to transition when they want to, or get the full value out of their business. It pushes back their retirement and causes unneeded stress in their lives. The best time to plan your transition is now, when you have the time and the access to the resources that will help you get the results you want. Determine if the value of your business will help you reach your goals.
Author: Lisa M. Cribben, CPA/ABV, ASA, CMA, Partner, Business Valuation and Transaction Support Services, WIPFLi
If you know of someone who’s thinking of selling or buying a business, who might benefit from a complimentary, confidential, consultation, have them contact me directly at 813.299.7862, or firstname.lastname@example.org
Mike Ertel, CBI, M&AMI, CM&AA, Managing Director, Transworld M&A Advisors