Studies indicate that on average, the value of a business makes up 70-80 percent of an entrepreneur's total portfolio. However, most business owners don’t know how much their business is really worth. For the business owner nearing retirement, knowing the accurate value of their business is essential to completing a financial/wealth management plan.
Financial advisors have the unique perspective on a business owners’ personal financial picture, but not necessarily an in-depth understanding of a company’s value. The entrepreneur’s business interests can be complex and difficult to work into a comprehensive financial plan.
This article will educate financial advisors on some red flags that a business owner/ client may face. Owners may be at risk of jeopardizing their retirement income by failing to plan their business exit.
How Much Is The Business Worth?
An owner’s business is often the most valuable asset that they own, as well as being the primary source of personal income. Managing a successful business requires a huge personal sacrifice, and growing the enterprise into a viable business can take decades. The choice to exit the company may be the most important professional decision an owner ever makes.
In order to make an informed decision about planning an exit, an owner needs to know the approximate value of their business. Assume, for example, that Mary owns Snowline Outdoor, a $15 million sporting goods manufacturer that specializes in hiking, biking and camping gear. Over the years, Mary has built Snowline into a well-respected brand name, and she has been able to differentiate her products from other manufacturers in the industry. Consider these factors that impact the valuation of Mary’s business:
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Valuation Expert: A valuation expert can provide the best estimate of the value of Mary’s business. The valuation will include an in-depth assessment of Snowline’s financial statements, and a comparison of Mary’s financial results with similar companies. The valuation can be a starting point for negotiating the sale of the business.
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State Of The Business Now: Why is Mary considering a business sale now? Does Snowline need more capital in order to grow? Is she concerned that she cannot keep her experienced management team in place? Does Snowline operate in a mature industry, one that makes growth difficult?
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Current Initiatives: What is Snowline doing right now to improve its financial results? Is there an opportunity to disrupt the industry? Can Snowline benefit from starting a new product line? Is there new technology that can help the company grow?
Each of these factors has an impact on the value of the business, and the timing of selling the business. If a client tells you that they’re considering a business sale, these issues need to be addressed.