Value Through the Lifetime of the Business

Obtaining an accurate business valuation has traditionally been a cumbersome, expensive process for business owners, frequently discouraging advisors from suggesting that executives undertake this exercise.  Business owners, including some 16 million self-employed Americans, tend to be rightfully focused on the day-to-day realities of operations with little time to shift their focus to higher-level strategic challenges.   Furthermore, the additional expenses associated with the valuation process and seemingly endless distractions occupied valuable time and usurped the limited resources available to business owners.

Today, however, technology has made on-demand business valuation not only easier but more affordable, too.  While certain situations will necessitate a formal traditional business appraisal, valuation software can be leveraged in many cases and open up a dialogue for advisors with business-owning clients.

Most business owners understand and appreciate the importance of an accurate business valuation as they approach the end of their business journey, but there are also powerful reasons for obtaining valuations at the early and middle stages of an evolving business.  Advisors who can clearly explain the advantages of on-demand valuations throughout all stages of a business – and take the time to learn the basics of business and its connection to business value optimization – will inevitably uncover timely situations for providing financial planning advice and earn the respect and attention of their most important clientele (business-owning clients).  The availability of sophisticated, algorithmic valuation software, provided by firms like Fortress Business Advisory, means that advisors can help business owners capture many of the benefits of obtaining ongoing valuations.

From the proper type and amount of insurance coverage to planning a successful exit or succession strategy, business owners who develop insights into their company and its value are better leaders and more able to proactively adapt to changing economic and market conditions.  Advisors who provide this service, in turn, can offer better advice, foresee unexpected planning opportunities, and ultimately create more value for their clients. 

Let’s take a closer look at examples of how understanding the value of a business proves transformative for business owners.

Starting a Business

Entrepreneurs who are launching their own firm can benefit from business valuations in even the earliest days. It is never too early to learn the fundamentals of business valuation and investment guru Warren Buffet has frequently commented on the supreme importance of this valuable skill set.  He once said that if MBA students were able to take only one course, it should be a course on private firm valuation!

Business owners who gain a picture of their business and its financial situation not long after they’ve opened their doors will possess a “starting point” from which to evaluate their company, providing perspective around growth and potential setbacks, as well as potentially helping to secure additional financing during earlier, often critical stages of a business.
In fact, a baseline valuation of a business is an important exercise when considering a future exit of the business – The U.S. Small Business Administration (SBA) suggests that business owners obtain a valuation long before they consider selling their business. That’s because it can provide owners with factors which impact the value of their company and allow them to take meaningful steps in increasing future sale value.

Periodic valuations, conducted economically and quickly using a service like Fortress Business Advisory, provide valuable historical information to help owners better control the direction of their company, identify opportunities for improvement and maximize the value of the company. Those metrics will eventually help owners if they decide to sell their business, but without looking too far ahead, they can prove useful long before succession conversations.

In situations where a business has more than one owner, partners obtaining life insurance policies on one another need to have an accurate and timely business valuation, as well. Insurance companies need this information for underwriting a buy/sell life insurance agreement, and partners will want this information to ensure they’re appropriately protecting their investments and entrepreneurship. 

When companies have the opportunity to expand through additional capital raises, investors will want to see a full company valuation report. This information provides transparency for potential investors and can facilitate favorable terms for fresh capital. Similarly, financial advisors can appropriately advise owners should a buyer emerge who wants to negotiate an acquisition. In that situation, an updated valuation provides important data points for all parties.

For companies offering employees the opportunity to own a share of the firm, periodic business valuations help owners and potential stakeholders accurately evaluate their investments. All parties gain confidence in the transactions and can better plan for the future.

Strategies Built For Today and Tomorrow

Business valuations are most commonly associated with exit strategies—and for good reason. Business owners who don’t know the value of their firm risk overestimating the wealth they have locked up in their business, potentially turning away interested buyers or even jeopardizing their own post-transaction plans or retirement. Similarly, undervaluing their business leaves money on the table—and for advisors—risks undermining client confidence in the financial advice clients have thus far received.

Advisors equipped with BizEquity’s state-of-the-art valuation software are better equipped to lead discussions with business owners around business optimization, more robust estate plans, comprehensive retirement plans, and greater financial well-being.  For business owners nearing retirement, historical and more recent business valuations can guide succession or exit planning decisions. Owners considering the sale of their business need to know the value of their company well in advance of a transaction, giving their advisor time to prepare for the tax implications of the sale.

In short, business owners need financial guidance throughout the entire business lifecycle, not just when they are looking to sell.