The Importance of Knowing What Your Company is Worth

By Generational Equity

06/12/2015

Given how critical it is for privately held business owners to know what their company is worth, I thought I would revisit the topic. If nothing else, if you are doing any estate planning at all, knowing what your company is worth is vital. Most business owners that we meet with have somewhere between 80-90% of their personal net worth tied up in one highly illiquid asset: the company they own.

Not only does this make estate planning tough, it also exposes the financial legacy you want to leave behind to your offspring to tremendous risk. But even if you are not planning to exit any time soon, knowing the value of your company today will allow you to take steps over the years to enhance and grow its valuation.

In the Generational Equity system, this is called our “Roadmap to Enhancing Value” and has proven time and time again to be valuable for those business owners who are 5 years or more away from retirement, as it allows them to take our recommendations and enhance the value and future sale-ability of the business.

But the first step under any of these scenarios is the initial evaluation of the business to determine its current market value. I recently came across a fantastic article written by Edward Mendlowitz, partner emeritus with WithumSmith+Brown, PC. Mendlowitz has more than 40 years of public accounting experience and is also accredited by the American Institute of Certified Public Accountants (AICPA) in business valuation and certified as a personal financial specialist (PFS). Oh, and he has written 24 books on accounting and related topics. So you can consider him an expert when it comes to company valuations.

The article he wrote was posted on quickreadbuzz.com, an online publication providing news and information for financial consultants. It was entitled “50 Reasons for a Business Appraisal.” To be honest with you, I had no idea that there were 50 reasons! And I have been studying the topic of business valuations for years, so Mendlowitz has done a very thorough job of helping business owners understand just how important business valuations can be. This is part of his opening:

Running a business causes owners to make dozens of decisions daily, many times without much advance thought and consideration. Unfortunately, it can become easy to lose perspective amidst competing priorities and deadlines. Having the business objectively and comprehensively valued—leading to a Conclusion of Value or a Calculation of Value—provides a look into how others would view the business, the size and scope of the asset that has been created, and identification of important and sometime latent value drives. The process of having the business valued can provide benefits far greater than the nominal cost.

We concur with Mendlowitz: The value to the business owner (even if the owner is years away from exiting/retiring/selling) far outweighs the cost of the evaluation. And here is why, as I have highlighted above: It provides a look into how others would view the business.

“Others” includes the professional evaluation team doing the valuation but also, most importantly, potential buyers and investors. This is eye-opening for many business owners we work with. They are so busy running the daily operations of their business AND they have no experience as buyers that they are unable to objectively view the strengths and weaknesses of the business – the fundamental issues that impact the perceived risk associated with the company by potential buyers.

For example one of the BIGGEST issues that causes concerns among professional buyers is excessive customer concentration. However, for many of our clients, they see the relationship that they have built over the years with Client X who represents 50% of revenue as a positive. On the one hand they are correct. To cultivate a relationship like this takes time and the ability to deliver on what you promise.

However, from a buyer’s perspective, any client generating that much revenue, who can walk away at any time (especially if the current owner is the primary contact with them), is a risk. But this is just one example of how a professional evaluation team like Generational Equity can help you see the business objectively and take steps to enhance the company’s sale-ability and value to buyers. By the way, the M&A Advisor recognized Generational Equity last year as the 2020 Valuation Firm of the Year. No team has done more professional valuations than us over the past few years.

The Top 50 Reasons To Get A Business Valuation

Getting back to Mendlowitz’s top 50 for a moment – time and space do not allow me to cover all 50. If you want to see them, review the entire article.

Several of his 50 reasons stand out based on our experience, so I have narrowed his 50 down to the Top 10 Reasons To Have Your Company Valued (paying homage to David Lettermen):

1. To know what the business is “worth”
2. To have an idea how the market would value the business should you want to sell
3. To establish a process that would make the company more marketable should the owner decide to sell or when they are ready to sell
4. To show how wealth is created and that can indicate a strategic direction to go in
5. To place the owner in a position to measure the business in terms of value creation and not on the immediate profit (or loss) from a transaction
6. To identify value drivers
7. To identify weaknesses or areas that dissipate value
8. For owners’ personal financial planning
9. For succession planning
10. To raise owners’ mindsets from daily operations to that of creating long-term and sustained value

Some of these we have already touched upon and others are self-explanatory. I have highlighted four of these above that based on my experience are the most important benefits of going through a professional valuation process. And I hear this all the time from clients we have successfully sold: The valuation alone was extremely valuable. 

As Warren Peck, former owner of Phoenix Rising Aviation, said, “No one likes to be told their baby is ugly, but I appreciated the honesty and reality that I needed to make some improvements.”

The four reasons for a business valuation that I’ve highlighted all revolve around a common theme: helping the business owner objectivelyanalyze his business and future business decisions in a whole new light as a buyer would.

“Going through the Generational Equity evaluation process actually made me a better CEO,” Brent Roth, owner of UST (a company we sold in 2013), recently told me. “The decisions I make now are based on facts and data, concepts that Generational Equity showed me were vital for the health of my company.”

Now the reality is, as Warren Peck said, you may not like the initial valuation of your company. But just as you don’t necessarily like what your doctor tells you, you still value his information because he is being objective about your health. The same is true for any reputable, professional valuation firm: If you are wise, you will heed their input on your business and plan your future based on their valuation.

If you are a business owner and like most, have no idea what your company is worth, I strongly suggest that you contact Generational Equity and discuss our business valuation services. It really is a vital first step in any strategic planning you may do going forward.

Contact us to learn more.

And special thanks to Edward Mendlowitz for creating such a timely, relevant article for business owners.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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