Do you care what your business is worth?
The CEOs of publically traded companies have immediate feedback each day as the stock ticker crawls across their computers. Shouldn’t leaders of private companies want similar feedback? Maybe not daily, but a periodic check on business value will help business leaders make decisions that lead to business growth and profitability.
It’s no surprise owners typically respond to a recommendation to have their business valued with some variation of: “Why now? I’m not planning to leave for years,” or “I built this company, so I know better than any so-called expert what it’s worth.”
Before you join these owners and scratch a business valuation off your list, consider four reasons you should care what your business is worth:
1. Leading growth in business value is the owner/president’s most important role.
2. A valuation provides owners (and employees) an objective basis for incentive plans.
3. It establishes your starting position and distance to the finish line.
4. It tests your exit objectives.
To consistently grow business value, progressive business leaders know they must motivate and retain key management and employees. Well-conceived incentive plans are key to this goal, and the most successful of those plans use formulas that link benefits to growth in profitability and business value. Employees are justifiably interested in knowing how value is measured and whether that method is fair. A third-party appraisal is often the best way to objectively determine value.
Eventually, all business owners will exit their business. For many, the value of the business represents the largest asset in the family estate. Given the importance of the business value, owners need to understand whether they are on track to their goals, or if not, how big the gap is in value. How else do you determine your starting point — today’s value — without the estimate of an experienced business valuation expert?
One of the first questions you’ll answer as you set your exit plan is: “How much will I need from the sale of my company to maintain the lifestyle I want for me and my family in retirement?” The companion question should be: “Is the business worth enough to support those needs?” You must know this answer before you can successfully proceed down any exit path — internal or external.
For business transitions to family or current employees, value is often determined by how much the business can afford to pay the owner over time. A value needs to be determined so as not to put the business at risk, while also providing for the retirement of the departing owner. The IRS also has something to say about the transfer valuation.
Value is not only relative based on successor choice, it fluctuates depending on how the owner plans to use the valuation. In co-owned companies, unless owners periodically update value established for the buy-sell agreement, one owner may receive too much or too little upon death, disability or departure, while the other may pay too much or too little. Outdated valuations often result in litigation (and subsequent loss of business value) as the slighted owner goes to court.
All business leaders want to see their companies increase in value, and on some level, all owners recognize they will leave the business someday. While you may not yet have a vision for the next stage of life, wise business owners understand that they need to know where they stand now and where they are planning to go.
John Kerschen is managing director of The Charter Group in Grand Rapids.