Whether you're passing the company on to a family-member or selling it to outside interests, you will require a business valuation that establishes a realistic and fair dollar number. This value will be an important focal point of your transition plan.
Valuating a business is not a simple task because the number you have in mind may not be the value that your family successors, potential buyers or tax assessors would arrive at. It's probably best to call in a specialist who can look at your assets, liabilities and goodwill with clear-eyed detachment.
To be able to deal with the situation, you should at least become aware of the different methods that can be used to arrive at your business valuation. Once you have that number, you may be able to find ways to improve the value of your existing business.
Valuation methods
There are a number of methods used to valuate a business and they can be used alone or in combination.
The asset-based approach totals up all investments made in the business to-date. However, this does not account for the depreciation in the value of machinery that may be several years old, or other assets that have declined in value.
When a company's market value is examined, it is compared to similar companies in the field and transactions that have occurred in the recent past. For a very specialized business however, it may be difficult to research comparable transactions.
Your company's past earnings can be used to calculate a price but those earnings are not a guarantee of future growth.
Doing it yourself
First, you should determine just what it is that will be passed on—or sold to—your successor(s).
Do you have significant physical assets or are you selling goodwill and client lists? How valuable is that client list, and does it include quality clients? Can you charge a premium for your client list, business name or logo?
If you have equipment, how much equity do you have in it? If it's not leased, perhaps you can ask a machinery dealer for an appraisal. How about receivables? What state are they in? What percent are at 60, 90 or more days?
Once the assets have been added up, subtract any liabilities; these include lawsuits and all outstanding company debts.
Some industry groups publish business valuation data based on sales and net cash flow. This data can be used to estimate the value of your business. Research firms similar to yours and see how much they sold for. However, your own company may be a model of efficiency and profitability that outstrips all the rest, making those other numbers irrelevant to your situation.
Getting professional help
Business valuation requires some leg work and a lot of research work. Do you have the time, the proper tools and the inclination to do it?
If not, you may be better served by a specialist—a business valuator—who may be an accountant or a lawyer, but who should be experienced enough to determine the best method or combination of methods for the task at hand.
Your present lawyer or accountant may be able to recommend someone. Be sure to ask for references for similar business valuations.
BDC Consulting has the resources to provide you with business valuation services, succession planning and customized management solutions.
Improving that number
Once you've arrived at a realistic number, it's only reasonable to wonder how that number can be improved.
Try to find some way to enhance value. One way to do this, is by increasing sales - the "top line" and reducing expenses such as owner perks to improve - the "bottom line".
Do you have any liabilities such as outstanding lawsuits? If so, these should be settled before you begin the transition process.
And if you are the business, that is, you are closely identified with the company, consider giving more responsibility to employees. They can make the transition to ownership and will thereby render your company more valuable.
Finally, your business may be more valuable in pieces rather than as a whole. A buyer for instance, may find your real estate more attractive as an asset rather than investing in a potentially risky business.
There are many ways to estimate and enhance the value of your company prior to your business succession and it pays to do your research and find a qualified business valuator. A professionally derived valuation will contribute to a smooth transition and continued harmony among family members.
