In order to sell your business you need to understand its value. A proper valuation is essential if you are going to gift any ownership to children or family members, or are going transfer any ownership in the form of options or stock grants to key employees. Your business valuation is the basis of all planning – and yes, valuing privately owned businesses is a black art – but it needs to be done. That said, your objectives can and should impact the valuation. If you plan on transferring your business to insiders you will find that you are better off using a minimum value for your ownership interest rather than the maximum value. Remember, your objective regarding what you want for the business comes down to what you get for it net after taxes. Hopefully this has you asking yourself some important questions.
If you plan on selling to a 3rd party remember, value is not the same as price. Price is what someone else will actually pay for the business. Price can, and is, impacted by current market conditions. The valuation process is an attempt to establish a basis for price.
Good exit plans are based on good information. For exit planning purposes, business value and forecasted cash flow are key. These need to be reviewed in light of your retirement requirements to determine if selling your business is even an option at this time. Not having good information in these essential areas: your retirement requirement; cash flow; and business value, make creating a meaningful exit plan challenging. Time invested in the process to gather and understand this information makes for a good foundation.
Do you really know what your business is worth? Do you think knowing is important?