What’s It Worth and Why it’s Important to Know the Value of Your Business
Most small business owners have much of their net worth tied up in their business. So, it’s surprising that many business owners do not have an accurate understanding of their business value. This is probably because businesses are not valued by easily accessible measures. If we want to know what our bank or retirement accounts are worth, we can find current values online instantaneously. It’s not so easy with one’s business.
Knowing the value of your business is important for a couple reasons.
If your business is a significant part of your net worth, an accurate valuation is critical to your retirement planning. You need to understand what it’s worth and when you plan to sell or transition the business. These data points weigh heavily in building an accurate picture of retirement. Too many business owners get ready to retire only to find that the sale of their business, after taxes, will not generate what they need to retire as planned.
Even if you are not nearing retirement or the transition of your business, an accurate valuation is an excellent measure of its performance. Tracking this year-to-year or on a trailing 12-month basis provides important data on whether your business is growing or contracting. This feedback keeps you focused on adjusting the key levers in your business that will move your value in the right direction.
So, what’s the best way to track the value of your business?
If you are within a year or two of selling your business, you should consider hiring a professional Accredited in Business Valuation (ABV). Working with an accredited professional takes time as they typically take a deep dive into your management processes and financial data.
Another option is to use an informal valuation method of applying a multiple (usually three to five times) to the company’s annual EBITDA (earnings before interest, taxes, depreciation, and amortization). You can track this yourself using your company’s income statement. Simply take your annual operating income and add back interest, income tax, depreciation, and amortization expenses to arrive at your EBITDA.
No matter the reason for getting a grasp on the value of your business, it’s worth it to take the time, and potential investment to get a good understanding of where you are today. This will allow you to develop and execute what is needed to get you where you want to be with the future value of your business.