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Why
and When Should You Think About Your Company's Value
There
are many reasons you'd want or need to have your
business valued. You might need a valuation as part of
your estate and gift tax planning. A change in
ownership might dictate an update for a new buy-sell
agreement. Some banks require them as part of getting
a new loan or re-structuring an existing loan. A
valuation could be used as part of litigation support
in the event of partnership dispute or divorce.
There are many different ways to come up with a value.
The IRS states that "a sound valuation will be
based upon all relevant facts… common sense,
informed judgment, and reasonableness." That's a
big help, isn't it?
There
are many reasons you'd want or need to have your
business valued. You might need a valuation as part of
your estate and gift tax planning. A change in
ownership might dictate an update for a new buy-sell
agreement. Some banks require them as part of getting
a new loan or re-structuring an existing loan. A
valuation could be used as part of litigation support
in the event of partnership dispute or divorce.
There are many different ways to come up with a value.
The IRS states that "a sound valuation will be
based upon all relevant facts… common sense,
informed judgment, and reasonableness." That's a
big help, isn't it?
One popular valuation method is what an owner believes
he or she deserves. For example, John Thomas wants to
sell his company. He's got $500,000 inventory at cost,
typically works 80+ hours a week, and generates about
$100,000 a year in owner's salary and net profit. He
believes his business is worth at least $1,000,000
based on "good will" and years of sweat
equity.
The official way to determine value is to bring in a
valuation specialist, preferably someone with
experience in your industry and professional
credentials. In some industries, in figuring a final
dollar amount, a valuation specialist might look at
the earnings power of the company to come up with a
final determination.
In the jewelry industry, the most traditional method
is to access the liquidation value; that is to say,
the value left over should the business cease
operations and sell its assets (inventory) and pay its
liabilities. Liquidation and valuation specialist
Bobby Wilkerson, of Wilkersons & Associates tells
his clients to figure on getting about $1.23 for every
$1 in inventory using his liquidation method. (That's
including all the inventory that's "older than
the hills, uglier than sin," according to
Wilkerson.)
Ultimately, unless you have a liquidation sale, an
on-going business is worth exactly what someone will
pay you for it. Let's say you had $1,000,000 to
invest. Would you buy John's business for the
privilege of working 80-hour weeks? Probably not.
You'd more likely find somewhere to park your money
that requires a lot less risk and a lot less work.
The
very best reason to think about the value of your
company is that it should determine your course of
action right now. And your question should be,
"What am I doing today that will add value
tomorrow?" What ultimately creates value are
profits and cash flow. (Note: you lose points with a
business that requires an owner on the premises 24/7.)
This only happens when your business has solid
management systems, great branding, sound inventory
controls, and superb merchandising.
Download
"What's
Your Business Worth?" to see different
formulas for determining a business' worth.
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