So Just Exactly How Much Is Your Company Worth?
One of the very first things that any of us does when we purchase a brand new car or home is make sure that the valued asset is properly insured.
After all, if an accident, emergency, or some force of nature were to come up unexpectedly that were to cause damage or loss of value to it, we would want to know that we have that protection to rely on.
Yet, even though most business owners work day in and day out on building their companies – many of them starting from absolute zero – roughly two-thirds have never had their businesses valued.1
And, of the just over one-third of the growing businesses that do have either an exit or a continuation plan in place, only 2 in 10 have actually planned for what would happen if the owner were to die unexpectedly.2
That could be a problem.
As a business owner, just think about the many people who rely on your company for income or support. This could include:
- Your family
- Your employees (and their families)
- Your vendors and suppliers
Depending on the situation, your company may also offer community and / or charitable support.
But, without any type of succession or exit plan for protection of the business, if the unexpected should occur, all of that could quickly come to a stop.
Why Business Valuation is Key to Future Planning
Business owners obviously need – and want – to know how much their companies are worth for a variety of different reasons. For one thing, it’s nice to put a dollar figure on all of your hard work.
But the valuation of your business is also important for when planning for potential future events, such as meeting longer term financial goals.
For example, it can help you in setting a more accurate price if you opt to sell the company – and, with the right type of planning, it can further help you in ensuring that the right amount of funds will be available from a qualified buyer.
There’s another reason, too, that many business owners may not often think of – or at least they may not like to think about it – when it comes to valuing their companies, and that is for estate planning purposes.
But the reality is that getting an accurate valuation of a business is essential when adding up the total value of one’s estate. Or when planning to sell or buy business life insurance.
How to Value a Business
The valuation of a business can be performed in a variety of different ways – and there is no one right or wrong method for doing so. Some of the more common valuation methods include:
- Asset Approach – The asset approach is often used with companies that have many fixed and tangible assets, such as inventory and equipment.
- Income Approach – The income approach uses past earnings in order to come up with a company’s estimated value based on its income potential.
- Market Value Approach – The market value approach is based upon the prices of similar companies that have recently been sold.
What is Your Company Worth?
When considering the value of your company, the bottom line is that the fair market value of the business will essentially end up to be the amount that is agreed upon by a willing buyer and you as a willing seller.
In order to ensure that you have a business succession plan that not only works the way that it is intended to, but that also protects your company for your employees and those you care about, it will be essential to first determine an accurate business value.
- Harris Interactive business owner survey 2012.
- 2. Ibid.