True or false: A business owner only needs to understand the value of his or her business when contemplating a sale or when a transaction is imminent.
This idea was not true before the events of 2020, and it is even less true due to the COVID-19 pandemic and its rippling effects through the economy.
Business value can be impactful for a variety of reasons, such as:
- Management planning (growth, strategy, recovery): What if I need to bring on a new partner? What if I need to raise capital to fund growth or recovery efforts? Am I making the right decisions (i.e. return on investment)? Are there acquisition opportunities (and, potentially, depressed values) in the market that will allow my company to grow?
- Succession planning: How and when am I ready to transition both responsibilities and ownership? Have I identified a successor (family member or other party, internal or external), and have they been made aware of ranges of value? Do I have a clear and current buy-sell agreement to facilitate shareholder transactions?
- Estate and gift planning: Is now a good time to accelerate gifting while business values are likely depressed? How might tax strategies change in an election year?
- Exit planning: Maybe I do want to exit my business – how has the current pandemic impacted pricing and timing? Should I delay the sale process due to a depressed value? Conversely, has my business value been positively impacted and is accelerating a sale now an option?
- Conflict resolution: Unfortunately, disputes are inevitable – do current stakeholders have an understanding on value in the event a dispute arises? Do I have a current buy-sell agreement in place? This understanding can save time and money during already uncomfortable times.
- Other valuation scenarios: Are there key employees I would like to recruit, retain, and/or incentivize with equity in the business? Am I pursuing certain loans or insurance policies which require a business valuation?
Understanding business value can be challenging in a normal environment. Add to that the current uncertainty caused by the pandemic, and it is even more important for business owners to understand the valuation process.