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When is the Best Time to Value your Business?

As a business owner, when would you say is the best time for examining and documenting the value of your business? Most business owners would rightly say “when I’m ready to sell” or, more vaguely, “when the time comes” in reference to some far-off milestone they are not quite sure about or prepared to face.

But is it always necessary to be facing a specific triggering event that makes conducting a business valuation a wise choice? These days, more and more business owners are learning that investing in the business valuation process at regular intervals is a source of highly useful information for both short and long-term business and financial health. But, when is the best time to value your business?

What is a Business Valuation?

What is a business valuation? At its most basic level, a valuation for business planning is like a health check-up for your company, giving you an idea of what your business is worth at any point in time. In most cases, that value is less than what you think. If anything, the exercise keeps you humble and hungry. But an up-to-date valuation provides so much more.

Armed with current data, you gain such valuable strategic insights as:

  • Which of your customers drive the majority of your company’s sales;
  • Whether your employee incentive and retention programs are based on realistic numbers;
  • What attributes most impact the company’s future value when it eventually comes time to exit the business.

The idea of what your business is worth is best explained by the standard of value known as an intrinsic or fundamental value, which is based on the owner’s perception of value inherent in the company. As is often the case, the amount an owner (or any investor in the business) considers to be true or real worth of a business or business interest is somewhat inflated.

In cases where the business owner is contemplating a sale, the owner’s gut instinct about the value of the business is usually tempered by what is known as its market value – the worth of the business as perceived by impartial investors out in the marketplace.

A simple example of this valuation dynamic would be, say, your estimate of what your 2015 Ford F-150 is worth compared to its Kelly Blue Book estimate.

At Withum, our goal with every valuation engagement is to build a supportable, independent opinion of value for our clients. Two pertinent questions we ask at the outset are:

  1. How much do you think your business is worth?
  2. Why?

The answers serve to set the valuation process in motion by giving us a view into your perceived understanding of business value. And so, the discussion begins.

We also look at how involved you are in the business, and how dependent the business is on you. The objective is to separate the value of your “personal goodwill” from the “enterprise goodwill” if the business were to be run without you. This provides a buyer with two distinct layers of the company’s value to consider when formulating an offer.

If a sale is anticipated, an equally important goal for us is to help you achieve the maximum price available in the marketplace at the time it is offered for sale. Having frank conversations early in the process helps get you there; because once the business is put up for sale, a whole range of market forces come into play.

For owners who aren’t yet contemplating a sale, but wish to maximize value as the business scales, we provide a service called Withum Navigator. Using a patented methodology developed at MIT, Navigator utilizes a two-step process to help you better understand, manage and monitor the intangible drivers behind your business. Your enterprise value is the yardstick – and driver – of success, not simply a financial measurement at a particular point in time.

Where to start? For most business owners, the thought of ensuring continuity, whether through sale or consolidation, can be a daunting task. But regular updates on the value of your business and the many ancillary benefits derived from the exercise can certainly help along the way.

A wise man once said, “There are only three things you can do with your business; sell it, close it, or die with it.” (Full disclosure: the quote belongs to Withum partner and valuation expert Paul Bardaro.)  If selling your business has ever crossed your mind – or if you simply wish to prioritize your strategic investments in ways that help improve your company’s performance – we stand ready to assist you.

Author: Cuthbert (Cutty) I. Thomas, CPA/ABV, CGMA | cthomas@withum.com

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