evaluating worth of business

3 Reasons You Need a Business Valuation

February 1, 2022

A full business valuation – many business owners hear those words and cringe.  Hours of data and document gathering, coupled with a hefty price tag, only for someone to provide an estimate of their business’ value that they already have a good handle on.  Why would anyone do that?  What are the benefits?  There are many reasons from a business standpoint to obtain a full valuation, but there are plenty of benefits from a personal financial planning standpoint, as well:

1. Know Your Number for Retirement

Many business owners start their personal retirement plan by asking themselves, “when do I want to sell the business?”  and “how much will I sell it for?”  After those two questions, they usually move on to other goals in their plan.  The business owner may think they have a good handle on the value to put into the retirement plan, but this can be an inappropriate figure to use.

Sure, the business owner is in the business every day and has a great handle on things, but a valuation expert has deep knowledge of various markets, business valuation multiples, market dynamics, business risks, and other factors affecting business value.  Using a best-guess business value could lead to the owner and their family relying on funds that may not end up being there after an eventual sale.

2. Crucial Estate Plan Considerations

In 2022, each individual can protect just over $12 million from the Federal estate tax at their passing.   Having an accurate business value allows the owner to know for certain how much of that Federal estate tax exemption will be needed to protect the business value if they were to pass away.

Also, if gifting any business stock during life, the IRS requires a valuation to be performed to support how the business owner arrived at the stock value being used on the gift tax return.

Further, depending on the business’s location, state estate taxes could be an issue since state-level exemptions are much lower than the current Federal exemption.  Knowing exactly what a business is worth will help the business owner and their family prepare for any estate taxes that may be due.  Failing to do so could result in diminished generational wealth.

3. Be Prepared for a Transition

Many business owners want to sell their business at some point but could have an inflated view of what it is worth.  A full business valuation allows the owner to go into potential sale negotiations with a clear picture of its fair market value.  If a valuation is not performed, the owner may pull out of negotiations because the potential buyer’s offer is perceived as a “low-ball” offer.  Not having an accurate feel for the true business value could push the business sale out years into the future, potentially affecting the owner’s family’s financial plan.

Yes, valuations can take a lot of time and energy, but they come with many important benefits.  For many families, the business is the most valuable asset they own – an accurate value being used is critical for an effective comprehensive financial plan to be crafted and put into motion.