The business is often the largest asset in a small business owner’s overall investment portfolio. And, as a result, they typically see the future value of the business as playing a key role in retirement or whatever they decide to do next after the business. A critical and foundational element to designing and creating an effective exit plan would be what we refer to as an “accurate financial gap analysis”. Simply put, this is a calculation subtracting the value of all current assets (including the business) from the amount needed for financial security or post-exit goals. If there is a significant “financial gap”, then it will usually need to be filled by increasing the value of the largest asset, the business.
The “fair market value” of a business is the amount agreed upon by a willing buyer and a willing seller, neither of which is under any compulsion to buy or sell, with both parties having knowledge of the relevant facts. And, so as a business owner, you may have the thought or question as to why even bother trying to value the business until a buyer comes along. Why not just wait and see what they offer? The following are some quick responses to that understandable question:
In planning for the future and how much you will need, you need to know the value of current assets to perform the calculation. The point here is to obtain the best estimate based on financial analysis of the business and current market conditions for a meaningful gap analysis.
If in performing a financial gap analysis, you learn that there is indeed a gap to be made up by increasing the value of the business, it will be important for you to know the real value now and what you will need to do in order to maximize sellable value to attain your goals.
If you receive an offer at the deal table and have not obtained a prior estimate of value from a valuation specialist, you will not be in your strongest position for negotiations. As a result, you may experience doubts during the negotiation, and regrets if the deal actually goes through.
These are just a few reasons to know the value of your business. There are others. We like to say, “Don’t wait until you feel pressure to begin planning”. If you wait until you’re ready to exit to obtain an objective analysis of the value of your business and perform an accurate financial gap analysis, you may find that you’re nowhere near ready to leave.
