(Dow Jones) The weak economy has dragged down the value of many small businesses and made getting an updated appraisal a discouraging task.
But some financial advisors are pressing business-owning clients to get one anyway, because up-to-date valuations are needed to adjust their retirement and estate plans accordingly.
A business's worth can change even when it isn't noticeably suffering in the downturn. "A lot of businesses are worth less even if they're doing fine," says Steve Parrish, national advanced solutions consultant for the Principal Financial Group. "There are fewer buyers and less money to make deals."
Many business owners are so focused on growing the business--or maybe just surviving--that they haven't thought about what has happened to its value. Some businesses are worth 30% less than a few years ago, says Denver financial advisor Dave Seems, who encourages clients to get the appraisal. "It's sort of a wake-up call," he says.
A relatively precise value is needed to make planning decisions, such as whether an owner needs to be saving more outside the business, or whether it is a good time to pass a stake in the business to heirs.
When owners find out their company is worth less than they believe, many make a decision to delay retirement or a sale in the short term. Some are prompted to put more effort into building up business, "to be able to sell at some future point," Seems says.
Kurt DeLucero, owner of Arrowhead Landscape Services in Colorado, wasn't too surprised by the numbers in his company's recent valuation, but he says that the information is useful because it highlights what needs to be done if he wants to be able to sell the business in 10 years.
"I truly like to know [the value]," he says. "It shows me where we are doing well, and where we can make some improvements."
An informal valuation could cost about $750 to $1,200 but a certified valuation that could be used to defend decisions in, for instance, a sale can cost $10,000 to $15,000 or even more.
An owner typically has 50% to 70% of their net worth in their business, says Steven Faulkner, head of specialty assets, J.P. Morgan Private Bank. Often, their investments outside of the business are largely cash, Faulkner says, and he encourages them to have a more diversified portfolio.