Why It’s Important To Know How Much Your Business Is Worth
As a small business owner, you have so much going on that you may not be thinking about how much your business is worth on a daily basis, especially if you’ve just started your business, and selling your business is in the far future to you and retirement seems like a lifetime away. However, getting a business valuation can prove useful at any time, even well before you put your ‘business for sale’ sign up. Here are several reasons why it’s important, even at the beginning stages, to ask ‘how much is my business worth?’
It Will Help Plan For The Future
It’s imperative for you to always look for ways to improve your business to aid in its future growth. Getting your business valued is a helpful way to do so as getting to know your business’s market value can help you see what the strengths of your business are and focus on improving the weaknesses. Being able to plan for your retirement or the sale of the business is made so much easier when you know what the business is worth, and you know where to work to continue to increase that value with confidence.
It Will Help You Buy Adequate Insurance
Business owners usually have life insurance to protect the business in case of their death or the death of a key employee. Not knowing the value of your business can mean you might be paying for more coverage than you actually need. Getting your business valued can allow you to understand what coverage your business actually needs and adjust your current insurance policies accordingly. The worst thing that could happen is to be throwing away money on extensive insurance coverage for things you don’t need. For example, a contracting company having Cyber Liability insurance may not be necessary if the majority of their work happens away from the digital realm. Making sure you know exactly what coverage your business needs can save you money long term.
It Will Attract Investors
As your business grows it's inevitable that you will need investors to fund your company, and they will all ask for a business valuation. You'll be hard pressed to find anyone willing to put their money on the line if they can't get a return on that investment. A business valuation will show potential investors not only what your company is worth right now, but what your future growth will look like.
It Will Help With Your Tax and Estate Planning
Unexpected events are always likely to occur, the most unfortunate would be the death of a business owner. If this does happen, usually the family or estate are liable to pay taxes on what the business is worth. If you do not already have a business valuation ready, it could lengthen the process by having to have the IRS appoint an expert to make a judgment on what is a fair market value for your business. Bear in mind that it’s difficult to benchmark a market value price from past events and the death of a business owner can affect its value.
How Do You Calculate Your Business Worth?
The best part is that you don’t have to hire an expert to evaluate how much your business is worth. There are several online tools that small businesses can use to get a ballpark estimate on their market value. Each tool uses a different method in the same way that different experts each have their own method of providing advice. For example, BizEx uses the ‘Multiple of Earnings’ method. It includes a breakdown of the company’s discretionary and multiple earnings so that you can get a valuation on a range of different variables, allowing you to choose what matters most to you. There are also simpler calculators such as CalcXML that takes only a few minutes and delivers valuation basics such as excess compensation, annual earnings, and level of business risk. Another notable tool is EquityNet which factors in your company’s value alongside competitors all across North America which is a variable that most experts and tools don’t have.
There are so many other tools you can try that prioritizes the variables that matter to you most since you know your business better than anyone else does. It’s important to always have an up to date valuation of your business to make sure that others can be just as aware of the value too. If the day comes when you’re ready to sell your business, you’ll be able to do so knowing you gave it away at the sale price it truly deserves.