Do you know how much your business is worth? And by worth, I mean what price it would realize if it was for sale today. Many times small business owners think their business is worth more than it currently is. This is often referred to as the value gap.
If your business represents a significant part of the funding for your retirement, you will want to determine the amount of this gap sooner rather than later.
Some reasons for the value gap:
- Much of your business value may be due to your expertise, relationships and reputation. Ask yourself this question: Can your cash flows/earnings be replicated in the future without your presence? If not, your business has little value to a purchaser.
- Profitability may be due to less than market rates being paid for management services, rent, etc.
- Your financial performance may be below industry averages. Buyers will examine key ratios to see how your business compares to the industry average.
- Your Company has not kept up with needed capital improvements, and/or repairs and maintenance requirements.
- You have been relying on rules of thumb or formulas provided by friends or associates.
- Value changes over time due to changes in economic and industry circumstances.
An up-to-date business valuation will identify the above factors and the amount of the value gap. This is an essential starting point for a successful retirement plan.
An up-to-date valuation will also help in being prepared for unforeseen circumstances such as divorce, death, or shareholder disputes.
Rick Evans is a Chartered Accountant, Certified Public Accountant (CPA-California), Accredited in Business Valuation (ABV), Certified in Financial Forensics (CFF), Certified Valuation Analyst (CVA) and a Certified Fraud Examiner (CFE).
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