3 Reasons You Need a Business Valuation
A full business valuation—many business owners simply hear these words and cringe. And while there are many business advantages to obtaining one, there are also plenty of personal financial planning benefits too. This article explains them all.
A full business valuation—many business owners simply hear these words and cringe. Hours of data and document gathering, coupled with a hefty price tag, only for someone to provide an estimate of your business’s value when you already have a good handle on it? Why would you do this? What are the benefits?
There are many reasons from a business standpoint to obtain a full valuation, but there are plenty of benefits from a personal financial planning standpoint, as well, including:
1. Knowing Your Number for Retirement
Consider that many business owners start their personal retirement plan by asking themselves, “when do I want to sell the business?” and “how much will I sell it for?”
Sure, you are in the business every day and have a great handle on things, but a valuation expert has deep knowledge of various markets, business valuation multiples, market dynamics, business risks, and other factors that can affect the value of your business. Relying on a best-guess business value could lead to you and your family relying on funds that may not end up being there after an eventual sale.
2. Crucial Estate Planning Considerations
In 2022, each individual can protect just over $12 million from the Federal estate tax at their passing. Having an accurate business value lets you know for certain how much of that Federal estate tax exemption will be needed to protect the business value if you were to pass away this year.
Also, if you are gifting any business stock during your lifetime, the IRS requires a valuation to be performed to support how you arrived at the stock value being used on the gift tax return.
Further, depending on the business’s location, state estate taxes could be an issue as well, since state-level exemptions are much lower than the current Federal one. Knowing exactly what a business is worth will help you and your family prepare for any estate taxes that may be due. Failing to do so could result in diminished generational wealth.
3. Being Prepared for a Transition
Many business owners want to sell their businesses at some point, but may have an inflated view of what it is worth. A full business valuation allows you to go into potential sale negotiations with a clear picture of fair market value. If a valuation is not performed, you may pull out of negotiations because you perceive the potential buyer’s offer as a “low-ball” offer. This could push the business sale out years into the future, potentially affecting your family’s financial plan.
Yes, valuations can take a lot of time and energy, but they come with many important benefits. For many families, the business is the most valuable asset they own. Having an accurate value is critical for an effective comprehensive financial plan to be crafted and put into motion.
