As a Business Owner, Why is it Important to Understand the Value of Your Company?

 

There are approximately 6 million companies in the United
States with revenues from $1 million to $150 million. Baby
boomers own roughly 50% of these businesses. Typically,
the perceived value of the business by the owner represents
75% or more of their personal net worth.

More often than not, a business owner has a much higher
perception of value versus what a buyer (either internal
or external), or investor is willing to pay for it. Even if the
owner has no intention of selling the business, the owner’s
perceived risk profile of the business is typically much lower
than the actual risk profile of the business. This is to say that
any areas of the business that are underdeveloped could
result in an interruption of cash flow which, in turn, could
have a negative impact on the company value. A lower
company value may then adversely affect the owner and
their family’s financial future. If the value of the business
represents the majority of an owner’s personal net
worth, and the owner is making future financial planning
decisions around this perceived value, this oversight could
be a dangerous approach to long-term personal financial
planning.

If you are someone that advises a business owner, such
as an attorney, CPA or wealth management advisor, you
should be discussing with your client the following:
• the need to truly understand the value of their business,
• how to protect their business value, and
• how to integrate their business value into their family’s
long-term financial security.

This is not a discussion that happens six months before an
owner plans to leave the business, when there is a health
issue or some other unplanned event. At that point, it is too
late.

With most other financial assets there is transparency
of value. At any given point we know what publicly
traded stocks and fixed income securities are worth. As
it relates to real estate assets an appraisal is obtained
prior to purchasing and is updated when the real estate
is refinanced. By understanding the value of the business,
an owner can appropriately plan to protect, maximize and
diversify the value of their largest asset.

Business owner planning around understanding the value
of their business, protecting value, maximizing value,
and integrating that into long-term financial security is
a proactive process. Unfortunately, too many owners
tend to be reactive, which is generally too late. The daily
operations of a business are always coming at the owner. A
business owner will do well to have a trusted advisor make
the planning process as important as the daily operations
of the company. The result will be a significantly increased
probability of a successful financial future for the business
owner.

© Chuck Owston, CM&AA, CEPA, Florida Capital Advisors