How Do You Know What Your Business Is Really Worth?
Most business owners have no idea what their business is really worth. The truth is that when it comes to knowing the true value of their business, there are complexities most owners don’t know about. If your business is going to be a large part of your retirement planning strategy, you’ll want to gain a deeper understanding of pricing before putting it on the market.
Part of a business’ worth is determined by a multiple of cash flow, specifically the owner benefit and that number multiplied by three and six. Figuring out the owner benefit valuation can be a tricky step in determining the true worth of a business. The owner benefit (OB) is the profit the business creates plus non-cash expenses, the excess cash the owner keeps and the benefit a new owner would not have to pay.
Differentiators that Impact Value
In order to truly determine what your business is worth, you need to know who the potential buyers are and why they are buying it. The reasoning behind the purchase affects the value of your business.
For instance, if someone is buying your business for investment purposes only, the real value will be lower. If the buyer is making an offer for strategic value or intellectual capital, you can expect your valuation to be higher.
If family members are planning to buy your business, you can expect a lower value. If an outsider is buying it, you can expect the value to be higher.
Put Yourself in the Buyers’ Shoes
One good way to know if you are valuing your business realistically is to put yourself in a potential buyer’s shoes for a more objective point of view. Buyers want hard evidence as to how much cash flow the business actually generates. This is how they will figure out the financing piece and if they can actually afford the business at the price you have set. After all, they will immediately need to generate enough income to support and justify their purchase.
Looking at your business from an outsider’s point of view will help you answer important questions that real buyers will want the answers to, specifically what is the absolute true value of the business and where is the evidence to support that number? Ask yourself honestly, if you were buying your business, would you be willing to pay the price you have set?
A Dose of Reality
When determining the true worth of your business, you need to remain realistic. There is good advice in the old saying, “plan for the worst” (in this case the lowest value) “and hope for the best” (the highest value).
If you are looking at your business value to fund at least a part of your retirement, making faulty assumptions and/or being overly optimistic about its true value could lead to a lot of disappointment and even being underfunded during retirement. Your business is probably your most valuable asset. Therefore, knowing what it is really worth will help you determine if you need to plan on additional savings outside of what you earn from the sale.
Don’t Go It Alone
Going through big life transitions such as divorce, retirement, or anything involving difficult financial decisions, is made easier with the help of an expert.
Steve Ford is Executive Vice President of Creative Business Services/CBS-Global.
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