Understanding what your business is worth

The CEOs of publicly traded companies get immediate feedback each day as the stock ticker crawls across their computers. Shouldn't leaders of private companies want similar feedback? Maybe not daily, but a periodic check on business value will help business leaders make decisions that lead to business growth and profitability.

John Kerschen, Managing Director, The Charter Group, discussed the benefits of business valuation in his recent article in the Grand Rapids Business Journal. Below is an excerpt. Read the full article here.

"It's no surprise owners typically respond to a recommendation to have their business valued with some variation of "Why now? I'm not planning to leave for years," or "I built this company, so I know what it's worth."

Before you join these owners and scratch a business valuation off your list, consider four reasons you should understand what your business is worth:

1. Leading growth in business value is the owner/president's most important role.

2. A valuation provides owners (and employees) an objective basis for incentive plans.

3. It establishes your starting position and distance to the finish line.

4. It tests your exit objectives.

Eventually, all business owners will exit their business. For many, their business is the largest asset in the family estate. Owners need to understand if the value of their business is on track to meet their goals, and if not, how big is the gap. 

To understand the gap, you'll first need to answer the question, "How much will I need from the sale of my company to maintain the lifestyle I want for me and my family in retirement?" And second, "Is the business worth enough to support those needs?" Once you know these answers, you can successfully proceed down any exit path - internal or external.

For business transitions to family or current employees, value is often determined by how much the business can afford to pay the owner over time. A value needs to be determined so as not to put the business at risk, while also providing for the retirement of the departing owner.

In co-owned companies, on the other hand, unless owners periodically update value established for the buy-sell agreement, one owner may receive too much or too little upon death, disability or departure, while the other may pay too much or too little. Outdated valuations often result in litigation (and subsequent loss of business value) as the slighted owner goes to court.

All business leaders want to see their companies increase in value, and on some level, all owners recognize they will leave the business someday. While you may not yet have a vision for the next stage of life, wise business owners understand that they need to know where they stand now and where they are planning to go."

The Charter Group can help you determine the value of your business in today's market and economic environment. To learn more, contact us.