Business owners frequently ask themselves and their trusted advisers if they need to spend money on a preliminary and independent business valuation as part of their exit strategy and whether it is a worthwhile investment. The answer is a resounding yes.
Business Exit Planning
It is critical to understand a business’ value. The prospective five-year cash flow estimate and preliminary company value are critical components of Exit Planning in establishing how to bring business owners to where they need to be financially when it’s time to exit. It’s also a requirement for getting the full fair market worth for one’s firm when it’s time to go.
Any good Business Exit Plan should be built entirely on the objectives of the business owner. Finding out how much money they need or anticipate to require when they leave the company is always a priority. The next step is to learn everything there is to know about the firm. Determining the company’s strengths and shortcomings is critical. The Exit Plan requires this information. If there are any gaps, closing or narrowing them can increase the company’s attractiveness and value to potential purchasers.
Certified Company Valuations
Employees gain a lot from a preliminary valuation as well. Stock Bonuses and Purchases, Phantom Stock Plans and Stock Appreciation Rights Plans and other forms of Non-Qualified Deferred Compensation Plans can all be structured using the valuation. These incentives are in place to encourage employee performance and improve the company’s total worth. They come from a preliminary appraisal. If the firm requires a boost, these incentives might bring the overall value up to the level required for a successful exit.
In many cases, especially when an insider is involved, accredited or certified business valuation professionals are essential. Business owners may choose to pass the firm on to a co-owner, employee, or even a relative in specific instances. A suggestion is generally made in these instances to start the transfer of ownership before the transfer of controlling interest. The IRS will scrutinize these sales closely because they are discounted and the owner obtains a higher payment. They will be curious as to why they are receiving less. In this situation, your Exit Strategy Specialist will be crucial.
An independent appraisal establishes the foundation for future planning, regardless of the possible buyer or selling date. It’s a good $5,000-$15,000 investment. There are several advantages. After selling or transferring the company, the business owner receives that money plus extra.
Stages of Exit Planning
When it comes to exit planning, a valuation typically comprises two stages. There are two types of valuations: preliminary and complete. The first stage, which accounts for roughly 60% of the overall price, lays the basis for the whole valuation. This stage does not include a written value judgment that includes all of your supporting data.
When a business owner does not have a preliminary valuation, it might have detrimental effects. Some businesses have been on the verge of shutting down when tragedy strikes. They realize their company could not support their exit after months of preparing and thousands of dollars. The problem might have arisen as a consequence of the timeline being unrealistic or the business not delivering the amount of money the owner expected. All of that effort and money were in vain.
Business owners should view their company in the same way that they treat their house. Do people sell their homes before they realize how much they’re worth? Many valuations show that a firm is worth considerably more than it was previously assumed, particularly when changes are made. For a secure future, the business owner must obtain as much safe, post-tax income as possible.
Ultimately, successful business owners should always identify a reliable and independent business valuation of their company before creating an exit strategy and selling it.
Need help with your business valuation steps? Please call or contact BA F|G.