Business owners often ask themselves and their trusted advisors if they need to spend money on a preliminary business valuation as part of their business exit strategy and if it is a worthy expense. The answer is definitely yes.
It is very important to know the value of a business. During Exit Planning, the future five-year cash flow forecast and preliminary company valuation are vital in determining how to get business owners where they need to be financially when it is time to leave their company. In addition, it is also a vital part of receiving the full fair market value for one’s business when the time comes to leave.
Any solid Business Exit Plan should be designed fully around the business owner’s goals. An important goal is always to find out how much income they need or expect to need when they leave the business. The next goal is to know the company inside and out. It is important to determine the company’s strengths and weaknesses. This information is vital to the Exit Plan. If weaknesses exist, eliminating or minimizing them will make the company more desirable and valuable to potential buyers.
Employees also benefit greatly from a preliminary valuation. The valuation will allow you to structure incentive plans that include Stock Bonuses and Purchases, Phantom Stock Plans and Stock Appreciation Rights Plans, and other types of Non-Qualified Deferred Compensation Plans. These incentives are set in place to drive employee performance and increase the overall value of the company. They are derived from the preliminary valuation. If the company needs a boost, these incentives can increase the overall value to where it needs to be for a successful exit to occur.
Certified valuation specialists are critical in many situations, especially if an insider is involved. In some cases, business owners make a decision to transfer the company to a co-owner, employee, or even a relative. In these cases, a recommendation to begin the transfer of ownership before the transfer of controlling interest is usually made. Since these sales are discounted and the owner receives a larger sum, the IRS will be sure to look at the deal carefully. They are receiving less and will want to know the reason. Your Exit Strategy Specialist will be very important in this case.
At the end of the day, regardless of the potential buyer or potential date of sale, an independent valuation lays the groundwork for planning the future. It is a sound investment of $5,000-$15,000. There are many benefits and in the end, the business owner gets that money back plus more when the company is sold or transferred.
A valuation usually has two phases in regards to exit planning. They are the preliminary valuation and the complete valuation. The preliminary stage will take about 60% of the total fee and is the groundwork for the complete valuation. This stage does not contain a written opinion of value, which has all of your supporting information.
There can be negative consequences involved with business owners not having a preliminary valuation. Some companies have been in the midst of their exit and had disaster strike. After months of exit planning and spending thousands of dollars, they realize their company could not support their exit. The trouble could have been a result in the timing not being realistic or the company not producing the amount of cash the owner was expecting. All of that work and money spent was for nothing.
Business owners should think of their company as they think of their house. Do people sell their houses without knowing what its worth? Many valuations prove that a company is worth far more than originally thought, especially when the improvements are made. It is important that the business owner get as much safe, post tax dollars as possible in order to have a secure future.
In conclusion, before planning an exit strategy and selling any company, successful business owners should always determine a reliable value of their company.