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Do you Need a Business Valuation?

February 3, 2016

Scott Danger works with business and individual clients out of the Mankato and Edina offices.  He is the partner with oversight responsibilities for business valuation services and is a Certified Valuation Analyst.  He also provides audit, tax, litigation support and consulting services.  

For individuals who invest in a mutual fund or publicly traded stock, determining the value of their investment is as easy as going online. Many business owners, on the other hand, can only guess at the value of their business. This is particularly unnerving when you consider the following: A survey of financial planners conducted by CNBC found that 70 percent of small-business owners’ wealth is invested in their companies.

If your business value represents a substantial portion of your total assets, a valuation may be a critical component in maximizing your wealth. Unfortunately for many business owners, the day they find out their company’s value is the day they look to sell. For many, it is simply too late.

Here’s a scenario we see all too often: A number of years ago, I was engaged to value a family-owned business. The parents owned 60 percent of the stock and their four children ages 45-55 owned the remaining 40 percent. All of the children were active in the business. The parents were looking to gift their remaining shares.

A few years prior to my valuation, the company was appraised when the parents gifted the first 40 percent. At this time, the company was valued at approximately $2 million with sales at about the same level. When I came in to value the company, its sales had risen to $6 million. Naturally, the family members assumed the value of the company had tripled as well. Unfortunately, due to shrinking margins and less cash flow, the value had not changed—it was still worth $2 million. A tough thing for the parents to hear as they thought they were giving each of their children an asset worth $1.5 million rather than $500,000. As you can imagine, it was a tough thing for the children to hear too, especially since the company’s value also represented their retirement. Fortunately, they still had time for growth.

The majority of the valuations we perform are compliance in nature, which means most are performed for gifting, estate, litigation or other required reasons. Even if you are not required to determine the value of your business, knowing its worth may be one of the most important planning tools you can have. Important takeaways from a valuation include the following:

  • Identifying a starting point – Every business owner has goals, written or otherwise. If increasing your business value is one of your goals, you need to have a starting point.
  • Benchmarking – How do you compare with your peers? Buyers pay a premium for top-performers. Knowing how you stack up to your competitors, both positive and negative, can drive decisions in your organization.
  • Determining your return on investment – Are you growing in value? Are you stagnant? Or are you going backwards?
  • Revealing your key drivers – All businesses have key drivers. What are yours?
  • Planning your exit strategy – When can you retire? Are you on track?

Business owners, by nature, are competitive. Value, not revenue or net income, is the true measure of success. As you make decisions in your business, value should at the forefront of your thoughts. Let it guide your strategy and decision-making process—and look ahead to opportunities to maximize your wealth.

If you have questions or would like to discuss this topic further, please don’t hesitate to email or call Scott at 507.304.6826.

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