Value Your Business? Then Get A Regular Valuation.

Todd Williams, CPA, CVA, ABI June 17th, 2021

You’ve heard it before, but we’ll say it again. One of the best strategic moves a business owner can make is to do regular valuations of the business. We recommend every three to five years, with three years being optimal, especially for multi-owner businesses.

Now, we understand the inertia that stands between you and a thorough business valuation. Sometimes it’s driven by not wanting to spend the money. Sometimes it’s a matter of feeling like you have too much to do already and don’t have the time. Many times, it’s a matter of not knowing the many potential benefits a valuation can offer, in terms of growing, streamlining, or otherwise improving the business itself.

But here is one insight we can offer from experience: those legitimate considerations quickly fall to the wayside when circumstances intervene and force a valuation of the business. That might be the death or disability of an owner; financial troubles that force a sale; a disagreement among owners about revenue sharing or other issues; or a change in family circumstances; or a change in tax laws. Any number of sudden unexpected causes can crop up, and then you’ll be pressed to do a lot of work in a short period of time, potentially exacerbating an already stressful situation.

Here are five really good reasons to do a business valuation sooner, rather than later. Most clients fall into one of these categories, some fall into more than one:

  1. Gifting of shares: Impending tax law changes, which are expected to reduce the unified gift credit exemption by a whopping 70%: from about $11.7 million per person to about $3.5 million per person. Anyone considering transferring ownership of a business through a gift of shares should be thinking about taking advantage of the existing unified credit rates this year. But in making those gifts, you’ll also 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.
  2. Speaking of succession planning: if you’re thinking about selling your business, the process can take several years and you need to start planning early. The first step, again, is to put a dollar value on the business as it stands right now. The benefit of starting early is that you can identify right now the things that contribute to its current value, and those things that may be detracting from value. You’ll have time to address the weaknesses and build on the strengths, potentially adding to the value of the business before you sell.
  3. Business insight and planning: In fact, strategic insight is one of the core benefits of doing a comprehensive business valuation. It sets the business value at a point today, while also identifying key elements that can add 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. On the other hand, maybe it identifies client segments that are more profitable than others: you can now build those customer segments, potentially adding to the growth and financial performance of the company.
  4. Retirement planning: For business owners, retirement planning is tied very closely to business succession planning, because the business is often the largest asset funding the owner’s retirement. To do proper planning — including investment planning — owners need to know how much that asset is worth at any given time. That value will factor into financial planning discussions around how to monetize the business asset; it can also factor into portfolio management decisions around invested assets, which are used to diversify the owner’s total asset portfolio.
  5. Keeping partners on an even keel: Finally, in businesses with multiple owners, a comprehensive, objective valuation is crucial to avoiding disputes and keeping all parties focused on growth and profitability — the two key drivers of value in any business. A third-party valuation, updated at regular intervals, is essential to drafting and updating operating agreements, partnership agreements, and shareholder agreements. They serve as a baseline for termination, withdrawal, or buy-sell agreements. And they are key documents for acquiring bank loans to support growth or insurance policies to fund retirement buyouts.

In short, there’s hardly a good reason to put off a business valuation. And there are plenty of great reasons to start on one. Here’s another: they get easier the more you do them. The process becomes more streamlined and takes less time the more you do it because you’re using a well-developed framework and updating data from previous years. (Which, incidentally, gives you 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 true valuation. In fact, the more we do them, the more satisfied faces we see, as business owners grasp the full range of insights and action points that a comprehensive valuation can provide.

Before fate forces your hand, please have a conversation with your adviser. And if it’s been more than three years since your last valuation, give us a call — we’ll be more than happy to get the process started.

Read More By Todd M. Williams, CPA, CVA, ABI

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investment advisory services are offered through Concord Wealth Partners, an SEC Registered Investment Advisor.

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