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Why you need to know what your business is worth

By Gerald Radican,

How much is your business worth?

If you don’t know the answer to that question, you owe it to yourself and the health of your business to find out. Your retirement and ultimate success of your business could depend on it.

 According to Spardata, a Maryland-based valuation firm, a typical business owner misjudges the value of his or her company by 59 percent. That’s because business owners often choose to estimate the value based on what other businesses in the same industry are valued. Such rationale assumes one business is identical to every other business in an industry, when in reality nothing could be further from the truth.

 Every business has distinct qualities. And any plan to help it succeed needs to be specific and adhere to business owners’ long-term professional and personal plans.

A miscalculation in valuation can create a shortfall for retirement planning, estate planning challenges and can ultimately leave business owners uninformed about what price to sell their business in order to live the lifestyle they are accustomed.

 The challenge is that many small business owners are adamant that they understand valuation — yet research paints a different reality.

 According to the MassMutual Business Owner Perspective Study: 2011 Insights in an Uncertain Economy, conducted by GfK Custom Research North America in 2011 for Massachusetts Mutual Life Insurance Company, four in 10 business owners felt that it was “extremely or very important” to know what their business is worth, and nearly six in 10 say they’ve had a business valuation done in the past three years. The problem is that one-quarter of those who claim to have done a business valuation did it on their own.

 A proper business valuation cannot be a “guestimate” or a figure agreed to with a handshake; it must be a thoughtfully crafted document written by a credentialed appraiser after a thorough analysis is conducted. It is also an exercise a business owner should undergo periodically to ensure valuation information keeps pace with the growth of the business over time.

 A proper valuation is always based on the key financials of the business, market conditions in the area, the industry in which the business operates, the nature of the business and informed judgment.

 Business owners should be certain that any firm or individual hired to value their business have proper credentials, such as: certified valuation analyst (CVA); accredited valuation analysis (AVA); accredited senior appraiser (ASA); accredited in business valuation (ABV).

 Accurately determining what your business is worth can help eliminate conflict between a buyer and a seller when an owner wants or has to transition the business, help business owners better estimate their retirement nest-egg and avoid potential estate tax issues.

 Gerald Radican is a financial professional with MassMutual’s Capitol Financial Partners in Vienna.

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