Warren Buffet is quoted as having once said “Price is what you pay, value is what you get.” There are many applications for this premise, but inherent within these words is the notion that value is something more than simply a price tag. This holds true particularly in determining business valuation.
Business valuations come in many different shapes and sizes. One of the key distinguishing factors between two different valuations may be the method used in valuing the company. Whether the method selected be a discounted cash flow/present value method or a market multiple value method, it is imperative that the business owner engage the services of a business valuation professional and business planning attorney to assist in this process.
Often a business owner will only seek to have a formal business valuation conducted if he or she is a target for acquisition, is looking to sell the company, or is going through some type of hardship like divorce, dissolution, or a corporate break-up. However, all business owners should consider having their businesses valued regularly, as the valuation can serve a variety of purposes, other than merely setting a price. Here are a few of those purposes:
Benchmark and Goal Setting
Having your business valued can help to establish a benchmark of the company’s worth. Measuring the value of the business is a necessary component in considering where the company has historically been, where it is today, and where the business owner can take it in the future. Having these types of trends supported by sound financial analysis can help chart the course for your company’s success.
As the saying goes, death and taxes are certainties. A valuation of the business will help the business owner(s) determine how much the company is worth and can guide them toward sound estate planning and retirement planning decisions that must be made in order to ensure the viability of the company as well as the legacy the business owner wishes to leave behind to his or her family, heirs, and/or assigns.
Key Person Succession
Rome was not built in a day and most businesses are not built single-handedly. If you are a business owner, chances are you have a “key person” who is your right hand (and probably your left hand as well). You’ll want to provide the right type of financial incentives to keep your key person(s) happy, and a sound succession plan to have the key person(s) take over leadership roles in the company after the business owner retires or passes away. This succession planning includes a solid business valuation which helps to establish the company’s present worth and as well as its future potential. Having the right type of key person “insurance coverage” in place and a reliable business valuation can help with the financial portion of this transition.
At some point or another, a banker, CPA, or the IRS may require a business valuation as a part and parcel of a larger financial transaction. In the case of a loan, the bank, or in the case of an audit, the IRS, may try to impose their own valuation on your business. Having your own pre-determined valuation can be valuable evidence to potentially counter any prescribed value imparted by a bank or the IRS and that can save a business owner money on their bottom line.
Business valuation is an invaluable tool to a business owner. It can help chart the course for your company’s growth and success, for your retirement, and for your legacy. As a business owner, you do not have to go it alone. Identify the gaps in your roster and get your team in place. A sound financial advisor, a solid CPA, a seasoned business valuation professional, and a strategic business planning attorney can all help to support and bring value to your company through operations, growth, and succession planning.
Our attorneys are here to help you plan and strategize for the future of your business.