To business owners, the value of the companies they created, nourished with capital, energy and time, and grew despite personal risks and inevitable market ups and downs, is immeasurable. The businesses and their assets are everything, and they are priceless to the owners.
What is your business really worth? This is important to understand whether you are in the position to sell or not. “Periodically during your business lifecycle, you should get a business valuation so you have an estimate of the worth of your business,” says Craig Johnson, president and CEO, Franklin Bank, Southfield, Mich.
Johnson turns business valuation, the second step for successful exit planning, over to Franklin Bank’s wealth planning and advisory arm: APB Financial Group Ltd. and its president Mero Capo. “Valuing your business properly enables you to transition out effectively,” Capo says.
Smart Business discussed with Capo what buyers look for and how a seller can properly value a business to maximize gains when it comes time to exit.
When should owners value their businesses?
The key is to start early well before you anticipate exiting the business. Valuation is a fluid process, and you need to take the time to do it right. So begin as you start your succession plan, at least five years before you want to exit your business.
Before you begin the valuation process, consider your personal finances. How much do you need to get out of your business to maintain your standard of living? Determine this early because the business’s value may not allow you to live as you choose after exiting. In that case, you will go back to the drawing board and increase overall value through growth, by trimming fat or increasing sales.
What are some preparatory measures to maximize the value of a business?
Before you sell your business, you don’t want to be running it out of your home and tracking financials on scrap paper. You need solid records, good, clean profit-and-loss statements and a set of operating systems that are productive, efficient and can be transferred to a new owner. A buyer will need a very clear picture of how your business operates and what kind of return he or she can expect from his or her investment. Your house needs to be in order, and your cash flow must be healthy.
What else will a third-party buyer look for in a business?
Put yourself in the buyer’s shoes and consider what aspects of a company make it attractive. For one, what is the economic outlook for the industry and in what financial condition is the company?
As a seller, you should be able to effectively communicate the nature of your business and its history. Is the company one that can live on without you? Are key managers in place, and will they stay onboard following the transition to new ownership? This is especially important if a buyer from another industry is considering your business. People are a strong asset.
Finally, you’ll provide the buyer with the net assets of your company. This is where a business valuation expert comes in. He or she will present the buyer’s point of view and the true market value for your business.
What happens when owners overvalue their businesses?
Basically, the business sits on the shelf. But keep in mind, depending on your succession plan, you may not want the business to be valued at its highest. For example, if family will purchase the business from you, you’ll want to mitigate tax costs (gift tax and corporate gains tax) and also ensure that the operation is within reach for this person. If it is priced too high, family may not be able to afford the business, and even so, the taxes may be prohibitive. On the other hand, if you will sell your business to a third party, you want to maximize your gains.
Once owners place a value on their businesses, what variables determine whether they will get this value from buyers?
First, consider the economy during the point in time you want to sell. Is your industry in a downturn? This will impact the value of your business to a buyer. Also take a look at interest rates the availability of money. If interest rates are high, your cash flow should be able to pay the buyer’s debt service.
If you value your business several years before you plan to sell, you can exit at the most advantageous time and maximize the value of your life’s work.
MERO CAPO is president of APB Financial Group, Ltd., the wealth planning and advisory arm of Franklin Bank. Reach him via firstname.lastname@example.org. Reach Craig Johnson, president and CEO of Franklin Bank, at email@example.com or (248) 386-9860.