What he did not know when he first tried to buy his own repair shop several years ago was how difficult it would be to pin down shop owners on the actual value of their businesses. Few owners seemed even to know how to make a good guess. “One guy I talked to about selling said the business had to be worth $1 million, because that’s what he needed to retire on,” Mr. Ritz said. “Another was like, ‘Well, let me see, my alimony is $4,500 a month. … ’ It was ridiculous.”
What is your business worth to you? What is your business worth to a potential buyer? These are two entirely different questions. As a business owner, you should be able to answer both questions fully and truthfully. In other words, you should know the value of your greatest asset and boldest venture, both personally and on the open market, because there may come a day when you need to sell or pass down the business. Knowing the numbers today can also help make you a better manager.
Valuations are difficult for business owners because there are so many variables to the process. That said, the ability of a business owner to fully understand their business from the outside – as the owner of an asset or as a prospector on the market – rather than from within the immediacy of running the business, is fundamentally important to managing the business well today and in the future. According to The New York Times, business owners are increasingly coming to terms with these issues. Their recent article, “Do You Know What Your Business Is Worth? You Should,” suggests that while most business owners put off getting a valuation until a sale is imminent, many are starting to treat the act of valuing their business as an integral part of running it. For example, valuations — whether performed by your accountant on an annual basis or with the assistance of sophisticated software tools — can help business owners pinpoint management practices that may be undermining business value.
Isolating those variables, and acting on them, can drive your valuation higher.
Tax time is a great opportunity for you as a business owner to crunch numbers with your tax adviser and start getting a handle on the true value of your business … and some ideas for improvement.
You can learn more about this topic as well as other strategies on our website under the tab entitled: business planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.
Reference: The New York Times (January 30, 2013) “Do You Know What Your Business Is Worth? You Should”