I encourage business owners always to consider how they will get out of business when they start or acquire a business. Most tend to ignore this advice because they are so caught up in the “beginning” that they don’t (or can’t) envision the “ending.” What they fail to consider is that they inevitably WILL experience a transition event (either by dying, retiring, closing, or selling their business); therefore, their business goals should include a plan for transition. Key components of a transition plan include understanding and continually monitoring the value of their business and adjusting business and personal goals to reflect changes in business value. To that end, here are five reasons you should understand, periodically update, and continually monitor the value of your business:
- It establishes a baseline value for the business. While you may think the initial value is $0 when you start a business, it is not. Simply developing a solid business plan creates value. Regardless of the amount, however, the initial value is the baseline by which you measure future progress.
- It measures the progress of the business plan. The value of your business is one of several benchmarks that should be utilized to measure progress against the business plan. The information it provides will allow you to adjust your plan and optimize your chances for growing the type of business you envision.
- It is the foundation of a full-blown transition plan. A transition plan is not necessarily a plan on how to get out of business, but a plan on how the business will grow from infancy or initial purchase to maturity. Valuing your business will help you determine where you are on the transition continuum.
- It supports the development of your personal financial plan. Finally, valuing your business is essential for the development of your personal financial plan. Most personal financial plans include stocks, bonds, and insurance which are readily valued. Your business is another asset that impact your personal finances and whose value should be considered.
- It is your “insider” basis for establishing an asking price if you decide to sell. While the value of your business still requires a willing buyer to pay the amount you feel the business is worth, if calculated regularly throughout the life of the business, the business value will help you support and defend your asking price.
Most equate “valuing the business” with having a “business appraisal,” and therefore, balk at the idea of valuing their company regularly due to the potential cost. However, the two processes are very different. A full appraisal, which is typically required for most compliance or regulatory purposes, can be very costly, but a calculation of value, which is used for business growth and planning purposes, requires significantly less investment.