13 Feb Why is Knowing the Value of Your Business Important?
Written By: John Milnes, CVA
(3-4 minute read)
Small business owners are often heavily involved in their business, but many business owners do not know the true value of their business. A recent report shows that as many as 98% of business owners don’t know the value of their company.[1] This article will discuss a few of the main reasons why a business owner should know what their business is worth.
Preparing to Sell
This is one of the most important reasons that owners should know the value of their business, as they often rely on the sale of their business to fund their retirement or future opportunities. However, our appraisers have seen many instances involving business owners selling their businesses for well under fair market value, or not finding a buyer because the business was listed for too high a price. The cost of hiring a valuation firm today pales in comparison to the value gained by receiving an accurate business valuation, which provides the business owner advantages in quickly identifying serious buyers, having greater negotiating power, and closing the sale in a timely manner.
Obtaining Financing
If a business owner wants to receive financing to purchase new equipment or expand, they will likely be seeking out a commercial lender. Certain Small Business Administration (SBA) loan programs may require a third-party business valuation to understand the value and financial health of the business. Even in instances where a third-party valuation is not required by the SBA, certain lenders could prefer one to be obtained. Regardless of specific lender or loan program requirements, a business valuation can help the owner present a better package to a lender, making it easier to get the financing they need for their business. Additionally, obtaining a business valuation that is SBA and USPAP (Uniform Standards of Professional Appraisal Practice) compliant can expedite the lending process for all parties involved.
Growth
All business owners, in one way or another, want to see their business grow. However, many business owners have no real plan in place for how they can do this effectively. Knowing the business’s true value would be the best place to start for laying the groundwork in creating a growth plan. When done early, business owners can identify potential management and operational issues, as well as opportunities that can fuel future sales growth.
Estate Planning
Receiving a business valuation in support of estate planning allows business owners to understand the value of the assets that they hold and plan to transition to others. This allows the business owner to divide their interests properly and ensures that no one gets less than their fair share according to their wishes. Additionally, the Internal Revenue Service (IRS) requires a business valuation to determine the tax liability for gift or estate tax planning when a business owner wishes to gift company shares to another individual or upon the death of the business owner. Obtaining a business valuation from an independent appraiser will assist in complying with IRS regulations and being able to successfully navigate a potential tax audit.
Obtaining a business valuation can be a crucial step in meeting certain lending requirements, and knowing a business’ worth can provide vital knowledge to a business owner. Whether it is to ensure the owner gets a fair market price if they choose to sell, obtaining additional financing, or planning for the future, one thing is for sure – knowing the value of the business will help in driving growth.