If you are like most small business owners, you may find it difficult to plan your future. This is usually because the unknowns exceed the knowns. You might ask yourself; Will the economy stay booming? Will the regulation change? What will happen if I pass away early? How much is my business worth? You might not know how much to sell your business for, or where to find the right buyer. Obtaining the best price, or what the tax consequence will be when you sell will be a factor also. If you have a family
business or operate with a partner, you can surely bet on having more complexity.
When planning, it’s easy to become overwhelmed by all that isn’t known. However, when you decide to
step back and evaluate the pieces of the puzzle, they start to fit together. You might realize that not
everything is unknown.
The value of your business is a prime example of uncovering the unknown. If you are like 98% of the
other small businesses in this country, you don’t know the answer to this question. A valuation will give you a deep understanding of how much your business is worth, and how it compares to others in your industry. The objective is to plan on how to be more profitable and drive up
the value of your most precious asset.
According to a Financial Planning Association/CNBC study, over 70% of small business owners have most
of their wealth tied up in business assets. Being able to extract that value to your personal net worth is
a key differentiator from the middle class to the wealthy. Knowledge of how much your company is
worth brings clarity and insight into retirement and estate planning discussions, tax planning, exit
strategies, and insurance protection decisions.
Case Study:
One of my clients, let’s call him Bob, has been working with us for the past 6 months. He and his wife have been a pleasure to work with. We have discussed Social Security, Long Term Care, Pension Income,
Estate Planning, and Asset Distribution. His wife, we’ll call her Sherry, retired from CalPERS with a nice
pension and Bob has been in business for himself for many years (Sole Proprietorship). Bob always
expensed everything out of his business and never showed “profit”. So, like many people, he didn’t
think his business was worth anything and was planning on dissolving the business. Hearing this, we
immediately started digging into the business side of his finances and found that his revenue was
consistent every year, and well over $100,000. We also discovered that 65% of his revenue was
residual/recurring, and 3 clients provided 75% of his recurring revenue. He may not have thought his
business had value, but roughly $200,000 later he learned otherwise. As you can imagine, Bob and
Sherry were extremely happy to add that to their nest egg.
