Your business, your financial dreams: Get a handle on both with an informal valuation

, Your business, your financial dreams: Get a handle on both with an informal valuation

Track the estimated value of your—or your client’s—business with an eye to the good life when that business is sold or transferred.

, Your business, your financial dreams: Get a handle on both with an informal valuation

For many business owners, the health of their business and their personal finances are intermingled; the more they’ve invested personally in the business, the greater the blend.

It’s not uncommon to run across a 60-year old small business owner without a portfolio of stocks and bonds to manage. Nearly everything they own is tied up in the business, and so too are their financial lives. Everything from the day-to-day running of the business to succession, estate and tax planning are part-and-parcel of the owner’s personal financial profile.

For these, and even less vested owners, monitoring the estimated value of a business over time, and well in advance of relinquishing ownership, can be financially and personally rewarding. One, it allows business owners to track the effectiveness of business decisions and make adjustments that could drive a higher price at closing. And two, it helps business owners and their families deal with unexpected life events that might force a premature sale, such as a divorce or death.

It’s never been easier, or more cost-effective, to track the estimated value of a business over time. Business owners and their advisers can leverage valuation tools to give themselves and their families greater control over their financial future.

Know your KPIs

When a business is a primary financial asset, knowing its value informs financial decisions. Valuing a business, though, can be a moving target, especially when conditions at a company change quickly.

All businesses go through stages of development that will alter what a buyer is willing to pay. Moreover, data points around the strength of an industry or growth potential can be subjective. There’s no way to account for all events and circumstances that might impact the overall valuation of a business at a single point in time.

Generally, business valuation tools make use of company-, industry- and location-specific data points, known as key performance indicators (KPIs), to calculate general estimates of fair market value and liquidation value. Alone, these estimates provide a frame of reference for owners, shareholders and their advisers as they consider what comes next, including succession, exit strategies and continuing as a going concern.

Refreshing KPIs each year sheds light on what’s going right and what could be better. With these insights, adjustments can be made to increase the value of business leading into a succession or exit plan. Owners also get a better understanding of how business decisions impact the value of the company as well as their own personal financial profile.

The choice of KPIs is largely dependent on who the company is, who they serve and where they are located. For retail stores, critical KPIs might include capital expenditures and same store sales. A doctor’s office might prioritize cash flow to revenue and receivable conversions. An oil and gas concern might view the exploration success rate and refinery capacity as key measures to follow, among others.

The power of planning

With estimate in hand, the value of the business can be placed in its own bucket, separate and distinct, becoming just one part of a larger financial plan for the owners and their families. This overriding vision of the financial future should be customized to the goals, timelines and personal situations of those it benefits.

A living document, this financial plan will be updated as the value of the business changes. When it’s time to shed or transfer the business, the hard work of financial planning has already been done.

Work with a team

There are many reasons to sell a business, each impacting the speed to closing and any transition to new ownership. A business offer from the right buyer or at the right price could trigger a sale, as could declining revenues or falling market share.

A sale could also be prompted by disgruntled partners, the pursuit of a lifestyle change or a new business opportunity. Personal reasons might also trigger a sale, such as burnout, health problems, divorce, retirement, relocation, or financial reasons.

Typically, a combination of reasons drive a business sale. But what if you have not thought about who will buy or how you’ll sell? Or you come to realize that your best buyer may be internal, employees at the business who want to own what you’ve built?

Some of these decisions are more tax efficient than others. Engage a team to understand what decisions are on the menu and to showcase relative solutions to whatever those needs might be. If employees may be your strongest buyers, putting in place an Employee Stock Ownership Plan in advance of the sale could, for example, significantly enhance the tax efficiency of the transfer.

Your business valuation partner

Get your business—or your client’s business—value using a patented business valuation tool from Wambolt & Associates that easily and cost-effectively informs better financial decisions. We know the key decisions that drive the timing of a sale or transfer, and what you need to know to decide the time is right. Sit down with one of our advisors to get started planning your financial future, together.

, Your business, your financial dreams: Get a handle on both with an informal valuation

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Photo by Austin Distel on Unsplash

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Wambolt & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by Wambolt & Associates or performance returns of any Wambolt & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Wambolt & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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