Every entrepreneur launches a business and focuses on growing their venture. They rarely stopped to think about their exit plan as they began this new phase of life. However, an exit plan should be part of the process from day one.
When the day comes that the entrepreneur wants to move on to something new, they must have a business valuation. It serves as the foundation of the exit plan they have already established. Why is this valuation so important?
The Importance of a Business Valuation
When leaving a business, the owner must have a business valuation to ensure they price their organization correctly. A valuation also allows them to structure the deal favorably while planning for their taxes and retirement. Having this valuation done allows the owner to identify any value gaps and close them before putting the business up for sale.
The National Association of Certified Valuators and Analysts reports that this valuation is important for reasons other than selling the business. It may also be used during a divorce or partner buyout. The valuation is priceless when succession planning or during other periods of transition. With this data, the owner can exit the business confidently.
Valuation and the Exit Plan
The business valuation establishes the baseline value of the company. With the help of a qualified professional, the owner can know exactly what their business is worth today and what factors influence that value. This professional will help them determine where the organization stands when compared to industry benchmarks. Experts recommend choosing a certified professional who has obtained credentials from the ASA, NACVA, or a similar organization.
Value gaps that are identified must be addressed. Ones that may be uncovered during this valuation include high owner dependence, inconsistent cash flow, a need for system upgrades, adequate documentation, or customer concentration. When a business owner has this information, they can make corrections before putting the business up for sale.
The exit plan must define the timeline for this process and the target value. The business owner must know how much they want from the business and which value gaps they must close to obtain that amount. They need to put a plan in place to close the value gaps and determine how long it will take to implement the plan entirely. This plan serves as a road map for exiting the business confidently.
Tax and Deal Structuring
Valuation is also needed when structuring a deal for the transfer of ownership. If an owner sells the business to their children at less than fair market value, gift taxes may be assessed. The owner must decide between asset and stock sales because each has different tax consequences. Installment sales and deferred compensation may be reliant on the current value of the business. Work with a tax advisor or other qualified individual to structure this exit deal efficiently.
Reevaluate this exit plan regularly throughout the process, as the value of the company may change over time. Market conditions could shift or operations could improve, and the valuation needs to be updated in these situations. Plan for updated valuations every one to two years as the exit planning process moves forward.
Common Business Valuation Mistakes
Business owners often guesstimate the value of their organizations based on hearsay or revenue multiples. They may put off getting this valuation only to find they have no time to make the necessary improvements to increase the value. Risks and other hidden liabilities reduce the value, so a business owner should never overlook these. Furthermore, the owners should never assume that potential buyers will view the business in the same light that the owner does. They don’t have the emotional investment and may not value it as much as the business owner does.
A business owner can make informed decisions when they have a current and accurate valuation. This valuation is often used to make decisions while the owners are actively involved in the venture. It is also necessary for an exit planning toolbox. Every person should obtain a business valuation today so they know where they stand and what they need to do to achieve their goals.
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