Business owners know they won’t own their companies forever. Approximately 250,000 lower middle market business owners in the United States will try to exit their companies in the next 12 years. Of those 250,000, only 50,000 will be ready. Of those, 30,000 will go through with the transaction, and 16,000 of those will sell with concessions. Sadly, only 14,000 owners will sell their companies at the value they desire. The success rate of these attempts is forecasted at 5 percent.
It’s a sad tale, but a preventable one if business owners are proactive and understand the importance of tracking their company’s transferable value, which is a blueprint of a business’ worth.
Here are some things to understand about business valuation before you get started:
1. A business valuation is based on purpose, and different purposes can cause different values. Reasons to seek a business valuation include establishing a baseline for growth, determining an estimated sale price, creating a negotiating reference point when transitioning to another co-owner, or as part of preparing an estate plan.
2. You don’t determine the value of your business only to sell it. Always knowing the value can be priceless as a business decision-making tool for diversifying risk, borrowing money or planning to grow the business.
3. Work on your business, not in your business. Step back and look at the transferable value of the business with an objective third-party perspective, so you can truly see how it can impact your life as a business owner, especially if it might not be transferrable now.
4. A valuation is an intimate look at the business behind the scenes, including a close look at the qualitative factors of the business, along with financial aspects to identify the company’s weakest links or opportunities for improvement. Valuations should always be completed by a certified valuator — not just any lawyer or CPA.
5. It can sound scary, but there are big benefits to a business valuation, including risk reduction, team alignment, enhanced access to capital, and goal achievement. It also can help a business become more effective, controllable, predictable, and sustainable when improvements are made to increase the value.
6. It only has to be a large undertaking the first time. After that, a business valuation should be completed on a recurring basis, such as once every year or two.
A business valuation creates a map, so as a business owner, you know where you’ve been, where you’re going and the terrain that exists around you.
Chuck Mohler, CEO and founder of Eagle Corporate Advisors, is an expert in business valuation and will offer a workshop on the subject with the Henderson Chamber of Commerce’s Roadmap to Success Workshop Series from 7:30 to 9:30 a.m. Oct. 3 at the Henderson Business Resource Center, 112 S. Water St., inside the Wells Fargo building in Downtown Henderson. Additional information can be found at www.hendersonchamber.com.