"For many owners, the answer to one question determines their eagerness and ability to leave their companies: "How much is my business worth?" This question is indeed critical, and answering it is the second step of an effective seven-step Exit Plan.
As a hypothetical example, consider the plight of Mr. Kentucky, the owner of Big Woods Landscaping Supply Company.
Mr. Kentucky was ready — and had been for several years — to sell his company, but he felt it was worth a little more than its net asset value, his industry's rule of thumb when valuing his type of company. While that value of $2 million was not inconsiderable, Mr. Kentucky wanted more. As a consequence, he continued to work in the business well past the point at which he found it to be either fulfilling or energizing. In doing so, Mr. Kentucky committed to a serious but common ownership mistake: working after the fun and challenge are gone on the mistaken assumption that the company cannot be transferred for sufficient value.
Because Mr. Kentucky failed to get a proper and professional business valuation, he also failed to realize that his business could have been sold for significantly more money than his industry's "rule of thumb."
How can you avoid Mr. Kentucky's predicament?
Understand first that there are different types of valuations, performed by different types of valuation advisors, for different reasons.
Appreciate that different appraisers charge vastly different amounts for a valuation; and
Realize that the questions you need to ask now are: "What type of valuation do I need for my business?" and "Who should perform it?" The answers depend on how ready you are to leave your business.
If you are ready to exit the business now (meaning last Friday) you need more than just a thumbnail sketch of value. You need a thorough valuation that includes a marketability component: Can your company be sold today at its appraised value?
An experienced appraiser active in today's merger and acquisition marketplace can give you an accurate answer to that question. An accurate answer can tell you if your business is as ready to be sold as you are ready to leave it. Expect to pay $5,000 to $15,000 depending on the complexity of the valuation and the credentials or qualifications of the professional you select to value the company.
On the other hand, if you and your business are several years away from ownership transition, a full-blown valuation may be unnecessary. Instead, you need a value approximation or range of value — a "ballpark estimate" of what your business is worth today. Think of an annual valuation test of whether the business is on track and of the distance to the station. Depending on the size of your business and the need for certainty, your CPA can provide this type of valuation approximation for a modest fee.
Had Mr. Kentucky started with a "ballpark" valuation, he would have discovered his business was likely worth significantly more than he thought. He could then have paid a professional valuation expert to determine the value and marketability of the company, which would have opened the door for him to sell his business at that time.
"Ballpark" valuations, thorough valuation and marketability appraisals all have their place. Don't skimp on paying for an accurate valuation, but do not get one before you need it.
Why is a valuation necessary in this early stage of your exit planning? The answer is simply because you and your financial and tax advisors must be able to determine if your financial objective can be met by a sale or other transfer of your company, as well as to whom and when. Only a current business valuation can supply this vital information. Remember that the recent collapse of the mergers and acquisitions marketplace teaches us the valuable lesson that it takes both a strong company and a strong market to maximize business value.
Bottom Line: If you can realize your financial and other objectives today based on the current value and marketability of your business in today's market, why delay your exit?
Disclaimer: The information contained in this article is general in nature and is not legal advice. For information regarding your particular situation, contact an attorney or tax advisor. This article is believed to provide accurate and authoritative information related to the subject matter. The accuracy of the information is not guaranteed and is provided with the understanding that none of the providers of this article, including Business Enterprise Institute, Inc. is rendering legal, accounting or tax advice. In specific cases, clients should consult their legal accounting or tax advisors.
Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS under circular 230, we inform you that any U. S. Federal tax advice contained in this communication, unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any matters addressed herein.
The example provided is hypothetical and for illustrative purposes only. It includes fictitious names and does not represent any particular person or entity.
Larry E. Botts is a member of BEI's Network Of Exit Planning Advisors ©. Send questions to him at lbotts@thenautilusgroup.com.