If you’re a business owner, understanding the value of your business is crucial for multiple reasons. Whether you are sole proprietors or part of a partnership, having an accurate assessment of their business’s worth can help you make informed decisions regarding financial planning, retirement, and potential sales.
Why Business Valuation Matters
For sole proprietors, tracking the value of the business over time is essential. This helps project one’s financial future and determine whether the business’s worth aligns with retirement plans. Without regular valuation, a business owner may face uncertainty about whether the sale of the business will sustain a desired post-retirement lifestyle.
For businesses with multiple owners, valuation becomes even more critical. Succession planning, whether due to retirement, death, or disability, requires an accurate business valuation to ensure a smooth transition. Without it, surviving owners and family members could face confusion, financial setbacks, or disputes over the business’s worth. In unfortunate situations such as an owner’s death or disability, an uninformed spouse or heir might be taken advantage of due to a lack of understanding of fair business valuation.
The Cost of Business Valuations
Historically, business valuations conducted by certified professionals were expensive, often ranging from $10,000 to $50,000, depending on the business size. Due to the high cost, many business owners opted to conduct valuations only once every several years and used those estimates to adjust value in the interim.
To manage costs, a useful strategy is to establish a rule within the business that requires a formal valuation when a shareholder transaction affects more than 10% of company shares. Additionally, in cases involving IRS scrutiny or estate planning, a certified valuation may be necessary. These formal valuations provide credibility and protection when dealing with tax authorities or legal matters.
The Rise of Non-Certified Business Valuation Tools
Today, technological advancements and data analysis tools allow for more affordable, non-certified business valuations. While these valuations may not carry the same weight as certified reports, they can still provide a highly accurate estimate of business worth. These tools can generate valuations for as low as $4,000 to $5,000, with ongoing valuations available for less than a few thousand dollars annually. This cost-effective approach enables businesses to conduct valuations regularly rather than sporadically.
Key Benefits of Regular Business Valuation
At MPPL Financial, we encourage our business owner clients to engage with us for a business valuation for these benefits:
- Facilitating Fair Shareholder Transactions. When selling or transferring shares, an independent third-party valuation reduces disputes and ensures a fair deal for all parties involved.
- Enhancing Financial Planning for Retirement. Business owners can more accurately assess how their business value contributes to their retirement plans and adjust accordingly.
- Staying Current with Market Trends. Business valuation tools allow owners to track industry trends and market changes. For example, venture capital or private equity interest in an industry can dramatically shift valuation multiples, sometimes doubling business value within a short period.
- Benchmarking Against Industry Standards. Modern valuation tools analyze multiple years of financial data, assess key performance indicators (KPIs), and compare a business’s growth rate to industry benchmarks. This insight helps owners identify areas for improvement and optimize business performance.
Why Internal Valuations Pose Risks – Avoiding Common Valuation Pitfalls
We often see businesses try to simplify valuation with internal formulas. However, this approach carries risks. Market conditions fluctuate, and outdated valuation methods can lead to selling a business at a bargain or overpaying for shares. For example, a trucking firm that regularly received $20 million purchase offers, suddenly received a $50 million offer due to shifting market conditions. Without an up-to-date valuation, the business could have significantly undervalued itself.
Another crucial factor in valuation accuracy is recognizing “personal” expenditures embedded within the business. Many business owners benefit from perks such as company-paid vehicles or phones. When preparing for a sale, it’s important to identify and remove these expenses from financial statements to present a clear picture of true profitability to potential buyers. Additionally, if the business owner plays a significant operational role, the valuation should consider the cost of hiring someone to fulfill that role after the sale.
Conclusion
A business’s true value is ultimately determined by what someone is willing to pay for it. However, regular business valuation provides essential insights to guide decision-making, facilitate smooth transitions, and maximize financial outcomes. By using affordable, data-driven valuation tools, business owners can ensure they are well-prepared for any business transaction, whether it’s a sale, succession planning, or financial forecasting.
Investing in regular valuations is a smart strategy that offers long-term benefits, helping business owners stay informed, competitive, and financially secure.
If you would like to learn more about the ways MPPL Financial provides business valuation support to owners, reach out to us today.