The Small Business Administration estimates that in 2021, there were 32.5 million small businesses in the U.S., and that those businesses make up more than one third of their owner’s non-financial assets. The questions that every small business owner must ask of themselves is, how much is my business worth, and what is the exit strategy that allows me to maximize the value I receive when I exit the business? As a valuation expert, I always start with these seven questions.
Why do I need to value my business?
Life can come at you faster than you expect. Aside from the long-term goal of exiting the business, you might need a valuation for Estate Tax Planning, Shareholder Disputes, Buy/Sell Agreements, or even Marital Dissolution.
How does a valuation potentially add value to my business?
Every business is different. There are ownership issues, family involvement in the business, customer base, nature of the product and industry the business operates in, as well as the external factors such as the economy and the potential obsolescence of the current product line. During a business valuation, the professional will investigate the value drivers of your industry, as well as your company. Understanding the value drivers will help you focus on activities that increase profitability, and therefore future value.
What is involved in a Business Valuation?
A full valuation report that conforms with all of the professional standards required under the Uniform Standards of Professional Appraisal Practice (USPAP) is a complex undertaking, and business owners will want to make sure they are hiring a full-time fully accredited appraiser. The actual engagement consists of a visit to your operations and interviews with key management. It also consists of a detailed review of your financial information (typically for a five-year period), as well as adjusting those financials for expenses that a new buyer would not incur. The appraiser will need to obtain research regarding the industry that you operate in and compare your company with overall industry information. Finally, the appraiser will draft a full report that will contain the opinion of the Fair Market Value of your entity, or ownership interest in that entity.
Is this an expensive process?
If you look at the value of your business, the cost is actually very modest. The actual cost will be very dependent on the size of your business, as well as the complexity of your business. To quote a broad number, costs will range from $10,000 to $50,000.
I have seen on the internet, valuations available for as little as $75. Why don’t I just get my information that way?
As the old saying goes, you get what you pay for. If you are using a professional accredited appraiser, the actual engagement will take anywhere from 50 to 120 hours. Ask yourself what you are really getting for $75. Some appraisers work on an hourly basis, but others, like OnPointe, usually provide the appraisal for a fixed fee. A professional appraiser will always be happy to provide you with a quoted fee prior to your having to decide.
If I am thinking of selling or otherwise transitioning out of my business, when should I start the process?
On average, most business ownership transitions need to begin about five years prior to the date you want to be fully separated from the business. You should also be building a team today to assist you. That team should include your current accountant and attorney, the valuation professional, and perhaps a financial planner to help minimize the future potential taxes due on the sale.
What is my next step?
Give us a call; we will be more than happy to meet with you and your professionals to discuss our view for the future transition of your business.
For more information, contact Bob Kleeman, CPA/ABV/ASA at OnPointe Financial Valuation Group LLC. You can reach Bob at 303 771 8100 or [email protected] Mr. Kleeman has more than 40 years of valuation experience ranging in entity sizes from $250,000 to in excess of $1 billion. You can also get more information online at: OnPointe Financial Valuation