Owners of many small companies don’t know what their company is worth. This can be a risky business.
A whopping 98% of SMEs surveyed by M & T Bank over the last two years didn’t know their value. This is especially annoying for most business owners, given that their company is their most valuable asset.
“People whose main asset is a home want to know its value. When opening a securities account, they want to know its value. Give money to a financial adviser who was told to trust them. Never. They invest it and never report to you what it’s worth, “said Travis W. Harms, head of the Family Management Advisory Services Group at Mercer Capital. Told. “Just because your business isn’t fluid wealth doesn’t mean it’s not real wealth.”
Here are five points to help entrepreneurs understand the importance of assessing a business.
Ratings are important for running a business and selling it
Many business owners may be overwhelmed by their day-to-day operations and unable to focus on assessing the company. Others do not want to spend money or simply recognize the importance of having an objective third party measure of its value.
However, evaluation can be important for many reasons. Robert King, a partner in Crewe’s investment banking team, said that these include imminent sales, stock option issuance, succession planning, tax and real estate planning, financing, sales contract enforcement, insurance needs, or business funding. Includes acquisition of. ..
For example, suppose you want to give a company stock to your family. Understanding a company’s valuation is important for tax and property planning purposes. Another reason to evaluate your business is to use it as a checkpoint so that all your partners are on the same page. Even with a sales contract, there can be controversy over how the business will be valued for the purpose of separation. Realistic expectations of the business can help prevent long-term and annoying battles over the value of the company, even when it’s time for the owners to break up, Hamms said.
Brett Dearing, a partner and exit planning specialist at wealth management firm Cerity Partners, also needs to know the latest value of the business, as many owners do not plan to sell the business until the suitor knocks. If you do not have a current rating, you will be at a disadvantage in terms of negotiations. You may have an overly rosy outlook for your business or, conversely, significantly underestimate its potential.
“Many business owners don’t understand the value of their business before they sit down with the buyer at the negotiating table,” Deering said.
Certified professionals exist to evaluate your business
One of the best ways to find an expert to evaluate your business is to use one of three certification bodies.
Accredited in Business Valuation Credentials are awarded by the American Institute of Certified Public Accountants to qualified CPA and qualified valuation professionals. There is also a business evaluation certification by the American Society of Appraisers. In addition, the National Association of Certified Evaluation Analysts offers the designation of Certified Evaluation Analysts.
Having only one of these certifications does not guarantee the quality of the appraiser, but given the level of expertise required by these designations, it is the starting point for your baseline. Should be, said a business appraisal expert.
The calculation cost of the valuation is different
According to Harms, the cost issue is highly dependent on the size and complexity of the business, the scope of work required, the purpose of the assessment and the purpose of use, so there is no single answer.
Given these parameters, valuation can cost about $ 5,000 to about $ 50,000, according to valuation experts. Be specific to the appraisers about why you are asking for a rating and make sure they provide what you are looking for.
According to King, some of the assumptions that go into valuation for the purpose of asset planning and the issuance of stock-based compensation can be clearly different than in the case of financing or selling a business. “One size doesn’t fit all,” he said.
Business owners need to update this asset value on a regular basis
It can be done annually or every few years, depending on what needs to be evaluated.
It can also be done more often as you are trying to grow your business. M & T Bank offers a free digital platform that allows businesses to model how different outcomes affect their assessment. Although this is not a certified assessment, the service provides a baseline before moving on to the next step, said Jonathan Kolozsvary, director of M & T Bank’s new venture.
Evaluating your business on a regular basis can help you identify weaknesses and make improvements. Tami M. Bolder, Director of the CBIZ Valuation Group, said: “It also serves the purpose of general planning,” she said.