How to start assessing your company’s value

By Rachel Flaskey, Vice President

Recently I posed a series of questions for business owners to consider when thinking through their personal and business short and long-term goals. The first two questions addressed whether the company has a capable and effective management team that allows you, the business owner, to take a well-deserved break.

Did you take that break? Did anything happen at your company in your absence? If there were no major issues and everything held together, either you didn’t take a long enough vacation or you have a solid management team in place. If issues arose then that could not be handled, now is the time to address them. This may mean more training for your management team, finding new or adding to management, or hiring a consultant to help provide solutions and implement any needed changes.

It may seem that I’m overemphasizing the importance of maintaining a capable management team, but not having one can impact your options when you want to exit the company. A skilled management team could mean additional dollars in your pocket, because well-run companies can command a higher purchase price than companies that depend solely on one person.

The next questions asked were more specific to you as a business owner:

  • Is most of your net worth tied up in your company?
  • Do you know your company’s value?

If you answered “yes” and then “no,” you are not alone. Many people who own small to medium-sized businesses are in this same situation. It can come as a surprise to them when they planned on having $5 million for retirement, but find out their company may only sell for $1 to $2 million. How can you plan for the next stage in life without having this information? It is similar to investing in and then not monitoring your 401(k).

There are several ways to determine the value of your company. The optimal method is using a credentialed business valuation specialist to prepare a valuation of the company. In lieu of this, some business owners may turn to an investment banker or business broker for an estimate.

Having at least a rough estimate of your company’s value can help you plan the next stage for yourself and your company. If you start planning early enough, you may have time to increase the value of your business so you are able to exit with your targeted $5 million, rather than $1 million.

After gaining an understanding of what your business is worth, you may determine it’s time to start reducing your investment and ownership in your company to allow the next ownership group to gradually take over. There are several ways to provide you with some liquidity while slowly relinquishing control:

  • Having the company redeem your shares
  • Having new or existing owners buy shares directly from you
  • Injecting new debt capital into the business
  • Finding ways to utilize cash held by the business

In my next article, I will answer questions related to exit timing, finding or identifying potential buyers, and how sale structures can impact the taxes owed on the transaction. Use this time to find out what your business is worth, and how much of your net worth is dependent on its value. It can be a very effective planning tool and an eye-opener. By starting early, you allow yourself time for any needed improvements before you start the exit process.

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Original content written by Rachel Flaskey, Contributing Writer for American City Business Journals. Feb 26, 2016. https://www.bizjournals.com/bizjournals/how-to/sell-a-business/2016/02/how-to-start-assessing-your-companys-value.html