What is Your Business Worth?
Last year our center hosted two workshops and a small business discussion panel on Succession Planning, where our expert speakers and small business owners shared best practices for positioning your business for a profitable sale or ownership transfer.
If you missed those workshops, no worries - we recorded them and you can find them on the Small Business Academy. Also, Shawn Hyde from the International Society of Business Appraisers (ISBA) recently posted an excellent article on the ASBDC blog that also takes a look at the very complex question of "What is my business actually worth?"
A variant of that question might also be, “What is a specific percentage of my business worth?”
These questions get asked in situations such as the following:
When a partner wants to buy another partner’s ownership interest;
When an owner wants to bring in a new partner;
When the business is located in a community property state, and the owner is getting divorced;
When an owner receives an unanticipated offer to purchase the business;
When the owner wants to sell the business;
When an ownership interest is being gifted to children, and a gift tax return is needed;
When the business wants to sell to an Employee Stock Ownership Plan (ESOP);
When a non-controlling owner believes there are grounds for a shareholder oppression lawsuit;
When an event causes a business to experience economic damages or losses.
This is not an exhaustive list, but just a taste of some of the reasons why someone might ask the question. There are a lot of opportunities, among almost 28 million small businesses, for someone to wonder what the answer might be for his or her particular business.
What is really interesting, however, is that the value of a small business is not static. It varies over time, as operations and market conditions change. Suppose the business has just entered a new market, or lost a key employee, or opened a second location, or a competitor has opened up a location just down the street, or the local economy has recently started to grow at an increased rate? Each of these scenarios could result in a different value for the same business.
The value of a business can also change depending on the reason the valuation is needed. A simple example of this is illustrated with Kelley Blue Book (www.kbb.com). Kelley Blue Book is the most common resource for determining the value of a used car. If you go through the process on the Kelley Blue Book website to identify the value of your car, the site will give you both the Trade-in Value and a Private Party Value. The values will differ depending on whether you are selling the car to a private individual or to a dealer. It’s the same car, but it has two different values as of the same date, depending on how you plan to sell your car.
Business values work the same way. The value will be different if the business owner is getting a divorce vs. selling the business to a third party. There are many reasons for why this is so, but those are outside the scope of this article. (If you would like to discuss that question, please contact me.)
These questions are being asked almost every day, and there are really not that many people, relatively speaking, who are able to respond authoritatively. This is why, oftentimes, a business owner will look at the balance sheet, find the equity number, and decide that is what the business is worth.
There are a few problems with that answer, however (see a previous post for a discussion of the book value of equity), not the least of which is that the equity on a balance sheet does not include all of the intangible asset value the business might have.
Clearly, this is a complex topic with many variables to consider. If you would like assistance with your business valuation, selling your business, or creating a profitable succession plan, please reach out to our center to be connected with a knowledgeable Business Advisor to assist you. All advising services are confidential. Contact us at:
The Small Business Development Center - 716-338-1024 or firstname.lastname@example.org