What Is Your Business Worth?

image

What is the value of your business, and – if you’re not planning to sell in the near future – why do you need to know?

Business advisors say there are a number of very sound reasons to have this information. To name a few:

  • Planning for adequate funds for retirement
  • Ensuring that you have sufficient insurance
  • Helping to make a case when raising capital
  • Forming the basis for a buy-sell agreement, in which the value of an owner or partner’s share is determined in the event circumstances require a future sale
  • Aiding in tax strategy and wealth preservation in estate planning
  • Informing strategic business decisions and exit strategy

Fair warning: Business valuation is part art and part science, and can be heavily dependent on chance and market conditions. That said, there’s no shortage of businesses willing to provide guidance, for a fee. A trusted advisor will guide you through the steps needed to arrive at a fair value. Options include an online tool, such as the one offered by BizEquity.com; hiring a valuation expert (your state’s Certified Public Accountants association can help, as can the National Association of Certified Valuation Analysts); and hiring a professional advisor with experience in small businesses.


As a starting point, consider using the formula below. Though it is only a guideline, it can get you in the neighborhood of the right number, and help you start to wrap your mind around the issues involved in a business valuation.


Owner Benefit Calculation

This is a method of calculating what the business is worth to you as the owner and would therefore be worth to the next owner. Richard Parker, CEO of Diomo Corp., which publishes the How to Buy a Good Business at a Great Price series, explains how it works:

  • Pre-tax income (as on your company’s tax return), plus
  • Owner’s salary and perks (e.g., medical benefits, car), plus
  • Depreciation (the amount of equipment depreciation you are permitted to claim on your company’s income tax return), plus
  • Interest you are paying on business loans (since the new owner would not have this expense), minus
  • Capital expenditures allocation for necessary replacement equipment that the new owner would have to purchase

Do this calculation for the past three years (at minimum) and average the totals to arrive at an Owner Benefit calculation.* (Be sure to take into account extraordinary circumstances such as a big contract that’s going to expire, or a significant one-time legal bill.)


Typically, a small business will sell in a one to three times multiple of the Owner Benefit figure, Parker says. The key factor here is a business’s chances of transitioning successfully to a new owner.

If when the owner leaves, the main asset walks out the door – as in the case of sole practitioners – the risk of losing patients or clients is high, so the sale is likely to be at a multiple of one times Owner Benefit. If, on the other hand, a business has been around for many years with stable profit, it is more likely to sell in the three times multiple range.


For more information:
Diomo.com
National Association of Certified Valuators and Analysts, nacva.com
BizEquity.com

* This is a starting point when calculating the value of your business and is not meant to be the only determining factor. You should work with your legal advisor and ensure all relevant factors are included when determining your business valuation.

This is for informational purposes only. Cory Boyas does not provide tax or legal advice. You should speak to your tax and legal advisor before making any financial decisions. This article contains additional sources of information for your reference. Cory Boyas does not endorse, warrant or approve the content, correctness or accuracy of those third party sites.

The Basics of Retirement Planning for Small Business Owners

If you’re self-employed or own a small business and you haven’t established a retirement savings plan, it’s time to get started. By establishing a plan, you help yourself – and your employees – get started saving for retirement. Different plan designs offer different options. It’s important to understand these options so that you can select the plan most appropriate for you.

Some retirement plans are IRA-based like Simplified Employee Pensions (SEP) and SIMPLE IRAs. The deposits made to these plans are held in individual retirement accounts. True qualified plans, like 401(k)s, profit-sharing plans and defined-benefit plans, are subject to ERISA* rules and held in a trust account by an administrator.


Qualified plans are generally more complicated and expensive to maintain than IRA-based plans because of the ERISA laws. With an IRA-based plan, your employees own their contributions immediately. However, with qualified plans, you can require that your employees work a certain number of years before they are able to remove the employers’ contributions.

Each plan type has unique advantages and disadvantages, so you’ll need to clearly define your goals before selecting a plan. For example, do you want to maximize the amount you can save for your own retirement? Do you want to establish a plan funded by employer contributions, employee contributions or both? How about the flexibility to skip employer contributions in some years? Or what about finding a plan with the lowest costs or easiest administration?

The answers to these questions can help guide you and your retirement professional to the plan or combination of plans most appropriate for you.

Do You Need a Key-Employee Retention Program?

When is ignorance bliss?

Whether you are running a small business or a large corporation, chances are that the longevity of your business and your company’s financial success is dependent on one or more key employees. And when you have select employees that are so vital to your business, you are not taking necessary precautions if you are not taking steps to ensure that those employees will stay with your company and continue to be a positive force for your business.

Consider each of your executives and staff individually, and think in these terms – if they left the firm, would there be a negative impact because:

  • The employee has the ability to take clients when exiting?
  • The employee has an essential skill/license/credential that would shut off an income flow when exiting?
  • The employee has no non-compete agreement, and might not sign one if asked?
  • The employee has a vulnerable financial status (which could be improved with an appropriate plan in place)?
  • The employee has asked for a promotion, and was rejected?
  • There are one or two employees who have the essential skills necessary to run the business and are not replaceable?
  • A segment of the business has no trainees to replace key members, and the job market has no available replacements?
  • Your business does not have a cross-training program, and one or more employees are essential to its survival?


If you see a potential hazard to your company’s longevity, you should consider establishing an affordable retention program for your company. Along with providing incentives for your key employees to increase their loyalty, you also should give consideration to an appropriate benefits package that provides consistent, uniform benefits to help your employee retention efforts.

Be sure to look at all the options available to you as a business owner.

How to Keep Your Best Employees

image

A really good employee – one whose work ethic, skills, and personality are a great fit for your business – is hard to find. These days, it may be harder than ever; a recent national survey found that the percentage of business owners reporting they have jobs they are unable to fill (29 percent) is the highest it’s been since 2006.


As the owner of a small business, you don’t have limitless resources to bring in new talent, but you do have excellent options for keeping top performers happy. Consider the following guidelines:

Get the compensation right. Hard work can be rewarded in a lot of ways, but money and benefits are right up there. In fact, a recent national survey by global staffing firm, Robert Half, found that a quarter of companies reported losing employees in the past year to a job that paid more.


Your goal should be to provide a salary, based on parameters that you can explain to a key employee, so that he or she feels fairly compensated. So how do you get the range right? You can find United States salary data in a number
of places, including RobertHalf.com and Salary.com. Additional good sources for market rate salaries include other business owners in your area, owners of temp agencies, and your local or state chamber of commerce.

You might also consider providing an executive benefit plan, which can add life insurance, disability, or supplemental retirement benefits for a key employee.

Think past the paycheck. Owners of small businesses have the option to offer a number of cost-effective, but meaningful, perks that make a top employee feel valued. These can include taking him or her out to lunch, providing a gift certificate to a local restaurant, extra vacation days, or even a flexible schedule that allows working from home.

“Invest” in your good people. Let a valued staffer feel that his or her career can grow as the business does. “Where does the employee see himself or herself in three to five years? What areas of the business would he or she like to learn more about?” says E-Myth certified business coach, Jennifer Martin, of Zest Business Consulting in San Francisco. “Then, set them up for success.” Pay for work-related seminars, courses, or conferences; think of projects within other parts of the company that the employee can “stretch” for.

Create a positive employee culture. Big companies do this by creating elaborate statements and programs; owners of small businesses can achieve their ends by everyday actions:

  • Share your vision, goals, and expectations
  • Give every employee a chance to be respectfully heard
  • Check in frequently on how projects or tasks are going
  • Notice employee contributions and encourage others to do so
  • Have quarterly employee town hall meetings where everyone can discuss the business.

All these actions will foster a culture of camaraderie and pride. “One of the greatest incentives a business owner can provide is the chance to belong to a first-rate team, and an outstanding organization,” says business speaker and author Barry Maher. “One of my clients is the United States Army. Why do people perform so heroically in battle? Of course they love their country. But when you ask them about it, the answer you get is often the same one you get from championship sports teams: They did it for their teammates, because they didn’t want to let them down. And they felt like they were part of something special.”

Exit Planning: 3 Realistic Steps to Get You Started

image

You know you should do it. You’ve been meaning to get to it. It would protect your family in the event of your death, help ensure a comfortable retirement, allow others to begin to prepare to take over the business, and much more.
But the fact is, you don’t have a clear succession or exit plan in mind.

In that regard, you’re in the same boat as the majority of owners of small businesses. In fact, 83 percent of business owners in a recent survey1 admitted they do not have an exit plan, or have not documented or communicated their plan. Owners say they are too young, not well enough established, or just plain too busy building their business to have one. Often, they feel that personal or economic circumstances may change so much in 15 or 20 years that there’s no way to make a practical exit plan now.

If, for whatever reason, you’re not positioned to dive in to succession or exit planning, it may be most practical for you to begin by putting a toe in the water. Consider this advice on getting started from Jerry Mills, founder of B2B CFO and author of The Exit Strategy Handbook:

Get a life insurance policy, ASAP. This could cover all of the expenses your family would face, as well as future needs, such as college, and potential taxes that could be billed to the estate. A well-structured policy will protect your family and provide them with time to consider what to do about the business. So make life insurance coverage a number one priority.

Educate yourself. Exit planning is a very complicated subject. There are decisions to make about selling to a third party, transferring within a family, and so on. And while business owners are very intelligent about their own businesses, exit planning may not be their area of expertise.

Many business owners are probably going to roll their eyes and say, “Now I’ve got to read something else?” It’s worth any business owner’s time to find out how to fully realize the value of this significant asset. Knowledge is power. You can find any of a number of solid books on the topic, written by experienced professionals, on business bestseller lists.

Begin to create a team of trusted advisors. Don’t wait until you are actually facing a transaction to try to put together a team. By team I mean professionals such as a tax advisor (CPA), a transactional attorney, someone in a merger
and acquisition firm, a banker, a financial advisor. Take them out to lunch, host a dinner, or pick their brains in an informal way in the course of business. Ask questions – “I read this idea; what do you think?” It’s a way of enlarging your knowledge and, equally important, building relationships.

No business or owner fits into a cookie-cutter mold for succession or exit planning. By learning now about the terminology and mechanics of exiting a business, you’ll be well positioned to make good choices – and get good advice – when the time is right.

Older Posts

Newer Posts

Custom Post Images