You’ve heard it before, but we’ll say it again. One of the best strategic moves a business owner can make is to conduct a regular valuation of the business. We generally recommend every three to five years (three years being optimal), especially for businesses with multiple owners.
Now, we understand why many business owners choose to postpone getting a thorough valuation. For some, it’s driven by not wanting to spend the money. For others, it’s the feeling of being overwhelmed with other responsibilities and not having enough time. Many times, it’s simply a matter of not recognizing the potential benefits that a valuation can offer in growing, streamlining, or otherwise improving the business.
One insight we can offer from our years of experience is that these legitimate considerations quickly fall to the wayside when unexpected circumstances intervene and demand an accurate valuation. This could be the death or disability of an owner, financial struggles that prompt a sale, a dispute over revenue sharing or operational issues, a shift in family dynamics, or a change in tax laws. Sudden, unforeseen challenges can arise without warning and force you to have to do a lot of work in a short period of time—potentially exacerbating an already stressful situation.
Here are five reasons to do a business valuation sooner rather than later:
- Gifting of Shares: Transferring ownership of a business through a gift of shares, like any transfer of property from one individual to another, is subject to taxation. When making such gifts, you need to be able to tell the IRS what those shares are worth, and you can’t do that without a valuation from a licensed appraiser.
- Strategic Insight & Planning: A comprehensive business valuation doesn’t just assign a current dollar value to your company—it can also help you identify opportunities to potentially enhance its value over time. For example, maybe a large portion of your cash flow is tied up in excessive inventory, or your product development cycle is taking longer than you realized. These are the things that a valuation will reveal—and give you an opportunity to fix.
- Succession Planning: Selling your business is a process that can take several years, making early preparation key to developing an effective succession plan. By starting early and conducting regular valuations, you gain the opportunity to enhance your business’s strengths, address areas of improvement, and potentially increase its overall value before putting it up for sale.
- Retirement Planning: For many business owners, retirement planning is closely intertwined with succession planning, as the business typically represents one of the primary assets that will fund their retirement. Effective retirement planning—including developing an investment strategy—requires business owners to know how much their asset is worth at any given time. This valuation can play a critical role in financial planning discussions, helping to determine when and how to monetize the business. It can also influence portfolio management decisions around invested assets, which are used to diversify the owner’s overall portfolio.
- Keeping Partners on an Even Keel: Finally, in businesses with multiple owners, a comprehensive and objective valuation can help prevent disputes and keep all parties focused on growth and profitability—two key drivers of value in any business. An independent valuation, updated at regular intervals, is essential for drafting and updating operating agreements, partnership agreements, and shareholder agreements. These agreements serve as a baseline for events like termination, withdrawal, and buy-sell arrangements. Furthermore, an accurate valuation can also be instrumental in securing bank loans to support business growth or insurance policies to fund retirement buyouts.
In short, there’s rarely a good reason to delay a business valuation—and plenty of compelling reasons to start one. Keep in mind that they also tend to get easier the more you do them. With each iteration, the process becomes more streamlined and takes less time because you can leverage an existing framework and simply update data from previous years. This not only saves time but can also provide additional insight into the company’s long-term performance trends.
I don’t think there’s a business in the world that would suffer from an objective, transparent, and comprehensive valuation. In fact, the more we do them, the more satisfied faces we see, as business owners grasp the wide range of benefits and actionable insights that a valuation can offer.
Before fate forces your hand, have a conversation with your advisor. If it’s been more than three years since your last valuation, please reach out—we’ll be more than happy to help you get the process started.