Know your business’ value

If your business represents a substantial part of your net worth, it’s something you need to understand

Does your business represent a sizable portion of your net worth? Before discussing that question, let’s ask an even simpler one: Do you know the market value of your business? If you don’t, you shouldn’t feel bad; it’s a rare day that I meet a business owner that has an accurate sense of the value of their business. 

Almost everyone knows the value of their home equity, the balance of car loans and credit cards, a good estimate of their retirement fund or stock portfolio, and they can usually provide those numbers off the top of their head. But ask someone what the value of their business is and many can’t answer.

If your business represents a substantial part of your net worth, and represents a key element of your retirement, not only will you’ll need to know the value at a future retirement or exit date, but the value now. This provides you with a starting point, or a “road map”: the path and strategy to manage and grow your business to a desired value range.

Like other investment opportunities, there is no guarantee you can reach that value, but understanding what quantitative and qualitative aspects affect your business valuation are important tools to manage and plan for an eventual exit.

Like other parts of your net worth, value can grow incrementally. Making last-minute changes to your business right before you decide to sell will not automatically increase the asking price. Value growth takes time, proper strategy and effective management. Depending on your business and industry, exit planning should begin five or 10 years before a planned exit. This should be done in conjunction with your other professional advisors to coordinate the tax and estate aspects of a retirement or lifestyle change.

A few general suggestions:

1. If you haven’t, or it’s been a while, you should consult with a business broker or certified appraiser to get a market value of your business. It may be helpful to get several opinions: there can be differences in valuation models or adjustments for market factors.

2. Track and monitor similar business sales in your industry. Many transactions will be confidential, but brokers and investment advisors can access merger-and-acquisition databases to identify recent activity and industry ratios.

3. Understand the components of your business that affect value and salability; “lever points” that give you the best return on your enterprise value. It’s easy to be consumed with day-to-day operations, distracting you from larger strategic choices.

While we advise clients to prepare for their exit strategy the day they start their business, even a few years of planning can make a substantial difference. Your business is not just a source of income, it also represents a stored value; the sum of its goodwill, physical assets and the ability to generate cash flow.

Understanding how your business is valued along with planning will help you maximize that stored value when you exit the business. 

Brian D. Hanson, president of Maine Business Brokers and author of “A Basic Guide to Buying a Business,” can be contacted at 603-570-6160 or through MaineBusinessBrokers.com.