Why You Need to Know the Value of Your Business

By Chris Lambert, CPA, CGMA, CCIFP

According to The Exit Planning Institute (EPI), a national educator for those who specialize in helping business owners sell or transition their businesses, an estimated 4.5 million businesses representing more than $10 trillion in value will transition over the next decade or so.  Of those 4.5 million businesses, only 20% to 30% of them that go to market, actually end up selling. The EPI study also showed that many owners have little to no exit planning in place, even though most owners have 80% to 90% of their financial assets based in the business itself. A major source of this shift is the retirement of baby boomers of which 10,000 turn 65 every single day.  This is expected to continue into the 2030s.

Knowing the value of a business ahead of time helps owners find the best buyer, ensures a smooth transition and funds a retirement that is worth putting in all that hard work through the years. There are also some other reasons owners may need to know the value of their business.

Succession Planning
Even if you are not ready to retire, it is not too early to begin the business transition planning. A recent EPI survey showed 66% of business owners have no succession plan.   How do you want to exit?  Is there family to take over?  Employees that would want to grow into ownership?  Defining those possibilities help determine what your options are.  In addition, knowing the value of your business at times during the lifecycle, help you craft possible transition plans.

Gifting and Estate Settlement
Another reason to determine the value of your business is for financial planning.  Is it possible you will gift ownership to your family members or others during your lifetime?  If so, you will need to value those transfers so that the Internal Revenue Service has a basis for agreeing with the gifting plan.  And separate from that, valuing the business over its lifecycle will help you with your estate planning, knowing what the possible taxable estate you might have and how to plan for that.

Divorce and Shareholder Disputes
Divorce and disputes are also reasons for valuing your business.  The rate of divorce for Americans is approximately 50% and is a big risk for a business owner. If the need arises to separate assets, knowing the value of your business is essential.

Compensation
Compensation such as ESOP or stock options offer a great opportunity to attract and retain the best talent. This also allows you to find a built in buyer for your business with potentially huge tax savings.

Mergers and Acquisitions
Negotiating an agreeable price can be a difficult process of back and forth between the buyers and sellers. Having the value of the business will help you construct the best deal possible.

Financial Reporting
Under Generally Accepted Accounting Principles when a business is purchased, you are required to allocate the purchase price to goodwill and other intangible values recorded on the financial statements. Having a formal valuation supports those values.  Additionally, over time, updated valuations may be needed to test for impairment of the reported amounts.

Litigation and Contract Disputes
If your business suffers a loss because a vendor violates your contract or a competitor encroaches on your patented process, knowing the value of your business will help determine damages.

Do not put off planning any longer. It is not just knowing how much you need to retire comfortably that should drive your desire to plan. What would happen to your business if you were suddenly no longer able to run it? On the other hand, what would it 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 an unexpected event. With careful planning your business, that you worked so hard to build can survive and thrive. Many owners wait too long to value their business and are unable to transition when they want to or get full value out of the business. This pushes back retirement and causes unneeded stress.

The best time to plan your transition is now when you have time and the access to the resources that will help you reach your goals. Getting a third party to appraise your business in a comprehensive, correct manner is of utmost importance. Suttle & Stalnaker, PLLC stands ready to help with business valuation experts – give us a call today.