Most entrepreneurs don’t reckon with the most valuable asset

Most entrepreneurs don’t reckon with the most valuable asset

Many small business owners don’t know what their business is worth, a practice that can amount to a risky business.

A whopping 98% of small businesses surveyed by M&T Bank over the past two years did not know the value of their companies. This is of particular concern, given that for most entrepreneurs, their company is their most valuable asset.

“People whose home is their main asset want to know how much it is worth. If you open a brokerage account, you want to know how much it is worth. You would never give your money to a financial advisor who told you to trust them while they invest it and they never tell you what it’s worth, ”said Travis W. Harms, who leads Mercer Capital’s family business advisory services group. “Just because your business isn’t liquid wealth doesn’t mean it’s not real wealth.”

Here are five points to help entrepreneurs understand the importance of enhancing a business.

Valuation is essential for running a business and selling it

Many entrepreneurs may be too overwhelmed with day-to-day operations to focus on the value of their business. Others don’t want to spend any money or just don’t realize the importance of having an objective third-party measure of its value.

An evaluation, however, can be critical for many reasons. These include an upcoming sale, the issuance of stock options, succession planning, tax and wealth planning, raising capital, implementing a sales agreement, insurance needs or to obtain corporate finance, said Robert King, partner of the team at Crewe’s investment banking.

For example, suppose you want to give business shares to a family member. Understanding the valuation of the company is important for wealth and tax planning purposes. Another reason to evaluate the company is as a checkpoint, so the partners are all on the same page. Even if there is a purchase agreement, there can be disputes over how a company is valued for separation purposes. Having realistic expectations for the company along the way can prevent a protracted and messy struggle for company value if the time comes for owners to separate, Harms said.

Knowing your business’s updated value is also important because many owners have no plans to sell their business until a suitor knocks, said Brett Dearing, partner and exit planning specialist with wealth management firm Cerity Partners. If you don’t have a current valuation, you will be at a trading disadvantage. You may have an overly rosy outlook for your business or, conversely, grossly underestimate its potential.

“Many entrepreneurs don’t understand the value of their business before they sit down with a buyer at the negotiating table,” Dearing said.

There are certified experts to evaluate your business

One of the best ways to find an expert to evaluate your business is through one of three credentials bodies.

The Accredited in Business Valuation credential is granted by the American Institute of Certified Public Accountants to CPAs and qualified valuation professionals who meet the requirements. There is also a business appraisal certification from the American Society of Appraisers. And the National Association of Certified Valuators and Analysts offers the Certified Valuation Analyst designation.

While having one of these certifications alone does not guarantee the quality of an appraiser, it should be the basic starting point given the level of experience these designations require, business valuation professionals said.

The cost of calculating an assessment will vary

There is no single answer to the question of cost, because it largely depends on the size and complexity of the company, the scope of work required, and the purpose and intended use of the assessment, Harms said.

Given these metrics, an appraisal could cost anywhere from about $ 5,000 to about $ 50,000, according to valuation professionals. Make sure you are specific with the appraiser about why you are looking for an appraisal so that they deliver what you are asking for.

Some of the assumptions that go into a valuation for the purposes of wealth planning or issuing an equity compensation could be vastly different than raising capital or selling a business, King said. “One size doesn’t fit all,” he said.

Entrepreneurs should regularly update this asset value

Depending on what you need the assessment for, it can be something you do every year or every few years.

It can also be done more frequently as you are looking to grow your business. M&T Bank offers a free digital platform that allows companies to model the impact of different results on their valuation. It’s not an accredited assessment, but the service offers a baseline before taking the next step, said Jonathan Kolozsvary, director of new initiatives at M&T Bank.

Regularly evaluating the company can help you determine weaknesses and make improvements. “If you go through the valuation process and the value isn’t exactly where you want it to be, you can improve your valuation based on the areas identified,” said Tami M. Bolder, director of CBIZ Valuation Group. “It’s also useful for general planning purposes,” he said.

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