If you own a business, chances are it’s by far your most valuable asset. So, what’s it worth?
Preparing to sell
Nearly 30 percent of RBC Wealth Management’s surveyed business owner clients currently have plans to sell or transition their businesses—70 percent of those in the next five years, according to the survey.
When thinking about their exit, valuation was a top concern of the surveyed owners. That’s because it’s a crucial step that helps create a more effective business transition plan.
Not only does a valuation give you an idea of what to expect from a sale, but it also helps you identify opportunities to optimize your business that could have a significant impact on the sale price—for example, by reducing costs and improving your margins over the upcoming years.
It’s important to have your valuation completed early—before you begin looking for buyers or discuss transitioning the business with family or business partners. That way you’ll have time to implement changes that may affect your business value, and you’ll be in a better position to negotiate if someone unexpectedly comes with an offer.
Making future investments
If you’re thinking about investing even more to grow your business, a valuation can show the return on the money you’ve already spent. “Before contributing another large round of savings or financing, wouldn’t it be nice to know how things worked out in the past?” Benturk asks.
The valuation and proof of past results would support your case to investors. It could also inform ways to spend additional capital that may generate the most value.
Retirement and estate planning
No matter how you transition your business, doing so will have implications for both your own future and that of your loved ones. Knowing your business value lets you see how much you’ll have for retirement and what might be available to leave to your heirs.
For example, if your valuation indicates that you will be exposed to estate taxes, your advisors can work together to identify tax-efficient strategies that may potentially reduce the tax hit for your heirs, such as by gifting business shares to younger family members.
They can also advise on other wishes for your estate, such as philanthropic donations, that may influence your succession planning.
Negotiating with your business partners
For family businesses or companies with multiple owners, if one of your business partners decides to leave, you or another partner may decide to buy out their share. The same is true if a partner passes away and you use a buy-sell agreement with their heirs.
Knowing the business’s valuation helps determine the amount for these future buyouts and enables you to have rational discussions with the best interests of all parties involved, without being clouded by emotions, stress or urgency.
How to get a business valuation
Some wealth management firms offer informal valuations to their clients for free. In this instance, you’ll need to provide your financial statements and business tax returns.
But if you are looking for a formal valuation that could form the basis of a buy-sell agreement or to help you prepare for a future sale, it could cost around $30,000 to $50,000, estimates Benturk. These valuations are in-depth, and the firm may partner with an investment bank with experience in your industry to research your valuation. This process takes several weeks, and selling can take several months, which is why it’s wise for business owners to get a head start.
Remember, even a formal valuation is still just an estimate. What you ultimately get in return for your business will be what someone is willing to pay.
But, when it comes time to sell, you may be able to use that to your advantage by seeking multiple offers and creating an auction process. “We had one client where the original estimate was $30 million, but after speaking with over 300 potential buyers, we ended up closing for close to $60 million,” he says.
Whether you’re getting ready to sell or simply want to enhance your business’s strategic planning, working with your financial advisor to understand your valuation is key to navigating the future with confidence.
