Is Your Business worth as Much as You Think It Is?

Is Your Business worth as Much as You Think It Is?

According to a 2013 State of Owners Readiness Survey, more than half of all business owners feel that they had a good idea of what their business is worth. Yet only 18 percent have had a formal valuation of their business conducted in the past two years. Many of these entrepreneurs may be headed for a rude awakening.

Pepperdine University also recently conducted an interesting survey that revealed that 1 in 3 sales deals failed in 2013. The top reason for this abysmal statistic? The buyer and seller couldn’t agree on the value of the company.

So, how can you figure out how much your business is really worth?

Because of frequent changes in your industry and in the economy at large, your company’s value isn’t set in stone. Ideally, your open market valuation should be updated every year. You can get an accurate open market valuation for about $1,000 to $2,000 if you hire a knowledgeable M&A advisor or CFP professional.

Although it is a bit of an investment, the benefits of getting an accurate valuation from a professional far outweigh the price tag. Once you have an idea of what your company would fetch on the open market you’ll be able to:

• Approach offers with confidence: If you’re approached with an unexpected deal, you’ll know whether the offer is realistic or not.

• Establish and test your exit objectives: You’ll know whether your company is worth enough to answer your lifestyle needs after the sale. If not, you can either adjust your expectations or put a more aggressive plan for increasing value in place.

• Have a basis for tax planning: If you don’t do appropriate tax planning ahead of time, taxes can significantly decrease your sale proceeds. You can use your accurate valuation to start implementing tax mitigation strategies that will save you tons of money in the long-term.

• Have an objective basis for incentive plans: The best incentive plans are built on formulas that link the bonus size to growth in business value. It’s smart to put incentive plans in place so that the company can retain your best people after the sale of your business.

A quick way to judge the relative value of your company is to get your Sellability Score. It will only take you about 15 minutes to get an idea of how your business would fair in the mergers and acquisitions market right now.