Knowing what their business is worth is of growing importance to business owners MassMutual surveyed – with just over half saying they’ve had their business valued in the last three years.1 However, it is considered a relatively high priority, with over half saying they frequently or often think about their business value.
The reasons given for wanting to know the value tend to focus more on measures of financial health rather than as a means of protecting the business or funding retirement. Many business owners also stated they would only complete a valuation when they are getting ready to sell.
Business owners are confident they know who the right resources are to solve this issue. Most say they would turn to their CPAs as the go-to person followed by a financial professional. But here’s the problem: one-third of those who claim to have done a business valuation in the last three years say they did it on their own.
A proper business valuation is not a “rule of thumb” or a figure agreed to with a handshake; it’s thoughtfully crafted by a credentialed appraiser after thorough research, is documented in writing and is reviewed and updated on a periodic basis. Be sure that any firm or individual you hire to value your business has the proper credentials, such as Certified Valuation Analyst (CVA), Accredited Senior Appraiser (ASA), or Accredited in Business Valuation (ABV).
There are critical times in the life cycle of a business when it is important to have an accurate valuation. In addition to measuring business health and preparing it for sale, here are other times when you may want to consider knowing what your business is worth.
Funding a buy-sell agreement
If you are obligated to buy out your partner (or a spouse) upon their disability, retirement, or premature death through a buy-sell agreement, you need to agree on a value that everyone (both the buyers and the sellers) is comfortable with ahead of time and have it in writing in the agreement. (Related: Funding a buy-sell agreement)
Retirement income planning
Your business is most likely your largest asset and a key component of your retirement plan. A valuation can help you reconcile your future retirement income needs with the current value of your business to help identify any shortfall. (Retirement planning calculator)
Estate tax planning
The current federal estate tax exemption has helped make federal estate taxes less of an issue. As of 2021, it stands at $11.7 million. But that level will expire by 2026. And there has been some political debate about lowering the exemption as the government revisits the tax code. So, for some, planning for a potential tax burden and the impact it could have on the next generation will always be critical for the long-term success of the business. (Related: Keeping a farm in the family)
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This article was originally published in July 2016. It has been updated.