There are many reasons you’d want or need to have your business valued. You might need a valuation as part of your estate and gift tax planning. A change in ownership might dictate an update for a new buy-sell agreement. Some banks require them as part of getting a new loan or re-structuring an existing loan. A valuation could be used as part of litigation support in the event of partnership dispute or divorce.
There are many different ways to come up with a value. The IRS states that “a sound valuation will be based upon all relevant facts… common sense, informed judgment, and reasonableness.” That’s a big help, isn’t it?
There are many reasons you’d want or need to have your business valued. You might need a valuation as part of your estate and gift tax planning. A change in ownership might dictate an update for a new buy-sell agreement. Some banks require them as part of getting a new loan or re-structuring an existing loan. A valuation could be used as part of litigation support in the event of partnership dispute or divorce.
There are many different ways to come up with a value. The IRS states that “a sound valuation will be based upon all relevant facts… common sense, informed judgment, and reasonableness.” That’s a big help, isn’t it?
One popular valuation method is what an owner believes he or she deserves. For example, John Thomas wants to sell his company. He’s got $500,000 inventory at cost, typically works 80+ hours a week, and generates about $100,000 a year in owner’s salary and net profit. He believes his business is worth at least $1,000,000 based on “good will” and years of sweat equity.
The official way to determine value is to bring in a valuation specialist, preferably someone with experience in your industry and professional credentials. In some industries, in figuring a final dollar amount, a valuation specialist might look at the earnings power of the company to come up with a final determination.
In the jewelry industry, the most traditional method is to access the liquidation value; that is to say, the value left over should the business cease operations and sell its assets (inventory) and pay its liabilities. Liquidation and valuation specialist Bobby Wilkerson, of Wilkersons & Associates tells his clients to figure on getting about $1.23 for every $1 in inventory using his liquidation method. (That’s including all the inventory that’s “older than the hills, uglier than sin,” according to Wilkerson.)
Ultimately, unless you have a liquidation sale, an on-going business is worth exactly what someone will pay you for it. Let’s say you had $1,000,000 to invest. Would you buy John’s business for the privilege of working 80-hour weeks? Probably not. You’d more likely find somewhere to park your money that requires a lot less risk and a lot less work.
The very best reason to think about the value of your company is that it should determine your course of action right now. And your question should be, “What am I doing today that will add value tomorrow?” What ultimately creates value are profits and cash flow. (Note: you lose points with a business that requires an owner on the premises 24/7.) This only happens when your business has solid management systems, great branding, sound inventory controls, and superb merchandising.
Download “What’s Your Business Worth?” to see different formulas for determining a business’ worth.
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