While many of us check our portfolios regularly and are always aware of what’s in our personal and business accounts, few of us really know exactly how much our business is worth. The truth is, many business owners overvalue their businesses based on rules of thumb, comparisons of what outwardly similar businesses have sold for, or simple gut feeling. Owners sometimes undervalue their businesses for the same reasons. This kind of ambiguity can have negative consequences for your future business plans. Putting a precise dollar amount on your company allows you to plan with confidence and make decisions about if or when to sell.
- Knowing Your Business’ Value Can Guide Future Growth
A business’s value can be indicative of how well (or whether) it’s growing. Although you might assume you have a good idea of your company’s growth and value by using indicators such as gross sales and cash flow, other factors often impact the actual value of the business.
For example, if your yearly cash flow is around $4 million and the equipment and property the company owns are worth $2 million, you might assume the business’ value is around $6 million (at the low end), right? Not always. What if most of your cash flow comes from a handful of big clients? Potential buyers might feel that the risk of losing one of those clients puts the business valuation below $6 million.
Likewise, if you as the owner are so central to your business that you’re personally the driving force for strong cash flows, a potential buyer might reduce their assessment of the business’ value to reflect the cost and risk associated with your departure. This is because if you were to leave the company by choice or chance, its revenue and cash flow might decrease or even cease.
Even if you never intend to sell your business, its value is primarily based on what qualified buyers are willing to pay for it. Understanding the factors that impact your business’ worth can give you an opportunity to diversify your client base or train new management to make your business more attractive when you’re ready to sell or hand it over.
In short, knowing what your business is worth right now—because of what you’re currently doing—can help you determine which areas of your business to improve to allow you to pursue your growth goals. Growth relies on numerous factors, some of which aren’t as obvious as hard numbers like cash flow. An awareness of these less-obvious factors can get you thinking about and acting on strategies to potentially strengthen the business’s vulnerable points, which can help guide your business toward the sale price you desire.
- Knowing Your Business’ Value Can Solidify Your Planning
In personal finance, if you don’t know what you currently have, it’s difficult to create a plan that will allow you to pursue what you want and need in the future. This reality applies to your post-business life goals, such as traveling more, spending more time with family or friends, and ultimately, retirement. It applies to goals you may have to leverage your business’ success as a force for good in the community, such as through charitable donations, and to estate-planning goals such as passing wealth on to your children and grandchildren.
Whatever your future goals, it’s difficult to accurately plan how to achieve them without knowing what you have and what you will need to adequately pursue them. Being overly ambitious about what you believe you can do, based on a gut feeling or rule of thumb about what your business is worth, can damage the business. If you wait to value your business until you need or want to sell, you may be severely disappointed or realize you could have sold five years sooner and be on the beach right now and sipping a margarita. Conversely, underestimating what your business is worth today can focus your attention, allowing you to pursue important short- and long-term goals right now so you can exit at the right time.
- Knowing Your Business’ Value Gives You Time to Adjust
Growing business value to the point where you can achieve your goals can take years. It’s rarely as easy as flipping a switch or making a small change, yet many business owners severely underestimate how much time it takes. This commonly leads to burnout, especially when owners view growth challenges as insurmountable. Knowing what the business is worth now can prevent you from burning out or staying in the business for longer than you want because it helps you determine how long it may take to build your business to where you need it to be.
Unless business ownership is merely a side project for you, the value of your business will likely be one of the most important factors affecting your future, the goals you want to pursue, and the people and causes you care about. That’s why when you’re considering selling your business, it’s important to work with a team of experienced and dedicated professionals like Affinity Ventures. If you’d like to sell your business with confidence or schedule a complimentary business valuation, contact us today at 505-881-5352 or fill out our contact form.