Goering Center news: Understanding the true value of your business

By Crystal Faulkner

Successful business owners take an immense amount of pride in the companies they have built. It likely supports the lifestyles of not only the owner and his or her family, but also likely benefits the possibly many other people who make it run every day. The products or services it provides are likely meaningful to many clients and customers. Yet, if someone asked, “how much is the business worth?” most business owners wouldn’t have a quantitative answer.

Many business owners aren’t exactly sure what their businesses are worth. More commonly, many business owners overestimate the value of their businesses, based on rules of thumb, comparing themselves to other similar businesses that have recently sold, or by a simple gut feeling. Less commonly, owners undervalue their businesses for the same reasons. One thing is clear: Failing to know what your business is worth right now can have negative consequences for the future of your business. These are a few of the reasons why knowing the value of your business is so important.

A business’ value can be indicative of how well (or whether) it’s growing. While factors such as gross sales and cash flow play an important role in determining business value, they aren’t the only factors.

For example, based on a multiple of cash flow, you might assume that your business’ value is approximately $4 million. However, if the cash flow results from two or three big clients, potential buyers may value the business below $4 million due to the risk of large losses if one of those clients leaves following a sale. Likewise, if you, as the owner, are the primary reason for strong cash flows, a potential buyer may reduce their assessment of the business’ value to reflect the cost and risk associated with your eventual absence. Even if you never intend to sell your business, its value is primarily based on what qualified buyers would be willing to pay for it.

In short, knowing what your business is worth right now — as a consequence of what you’re currently doing — can help you determine which areas of your business can improve to allow you to pursue your growth goals. Growth relies on numerous factors, some of which aren’t as obvious as cash flow. Awareness of these factors allows you to consider and act on strategies to strengthen your business value. Even if you don’t have immediate plans to exit your company, growing enterprise value gives you the financial freedom to make choices about your future.

Without knowing what you currently have, it’s difficult to create a plan that allows you to pursue what you want and need for the future. This applies to goals you may have for your post-business life, such as traveling more or spending more time with family. It applies to goals you may have to leverage your business’ success as a force for good in the community, such as through charitable donations. It applies to estate planning goals, like passing wealth to future generations.

Growing business value to a point at which you can achieve your goals can take years. It’s rarely as easy a flipping a switch or making a small change, yet many business owners severely underestimate how much time it takes. This commonly leads to burnout, especially when owners view the challenge of spurring needed growth as insurmountable. Knowing what the business is worth now can prevent a lot of these challenges, because it helps you determine how long it may take to build the business to where you need it to be.

Unless business ownership is merely a pet project, the value of your business will likely affect you, the goals you want to pursue, and the people and causes about which you care most. Start working with a CPA, business advisor or valuation specialist now so you can better prepare for what is ahead.

Crystal Faulkner is a Tax Partner and the Cincinnati Market Leader with MCM CPAs & Advisors, a Goering Cener member organization. Reach Crystal at 513-768-6796 or crystal.faulkner@mcmcpa.com.