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You Can Check Out Anytime You Like.. but you're better off if you figure out what a business is worth before you start!

Don Henley, the sage that he is, goes on to state that: "You can never leave"... yet that is just what every business owner has to do one way or another. The headlines suggest that the pace of the ownership transition of small businesses is increasing as the Boomers age, with some estimating that over $10 trillion dollars in liquidity will be generated by business transfers by 2020.

 

In many of these cases, the exit plan for a business owner will require a business valuation at some point in the process -  and generally, the earlier the better.

 

The initial valuation sets a  range of values which, in turn, dictates the possible exit strategies. Using the valuation, business owners can determine how the transfer of the business under different exit scenarios will affect their personal financial situations.

 

If sale to a third party is contemplated, the initial valuation can highlight the value drivers for the business and create a road map that directs the owners to focus on certain areas to maximize the ultimate sale price. This is particularly important if the initial value does not meet the financial goals that the owners have set for themselves and where the strategy is therefore to increase value in anticipation of a future sale.

 

If the owners want to transfer to other family members, then a formal valuation may be needed to support the sale price and show that there was no gift component to the transfer. Alternatively, if the business interests are being gifted, a valuation will be required to support the gift tax return.

 In some cases, the core management team are the likely purchasers. The initial valuation will determine the feasibility of this option and a full understanding by all the parties involved  of the valuation process and what causes value to change can help owners and managers feel that the final sales price is a fair reflection of value.

 

Some exit plans require mechanisms to tie existing key employees to the company up to and through any transition. These mechanisms are often tied to the value of the business and require an initial value to be set so that incentive payments can be measured.

 

The bottom line is that an initial valuation is a critical component to this process. The valuation can be fairly informal - you don't need a 100 page report. But owners do need something that sets the initial parameters for the exit planning process, otherwise the plan is built on shaky foundations and, (wait for the hook...), as Don Henley went on to say, they may find they are " all just prisoners here, of their own device" (whatever that means...!)