Articles Tagged ‘Business valuation’

Why You Need To Know The Value Of Your Business Today

Wednesday, June 1st, 2011

Presented by T. Ray Phillips

In today’s economy, no one wants to spend money on something they don’t need today. So why do you need an estimate of your company’s value when you don’t expect to leave for several or many years?

You don’t — if you fall into one of two groups:

Owners who are sure that their business exits are more than 10 years away.

Owners who are certain that the value of their companies is miniscule compared to what they will need upon sale or transfer.

Most owners, however, look to the value of their businesses as the chief source of liquidity for their post-exit lives. We intend to leave as soon as it is feasible rather than when we are completely burned out. Therefore, most of us need to know the value of our companies now so we can be smart about creating greater business value in as short a time as possible.

Knowing the value your business today is critical whether you plan to leave your business tomorrow, or in five years because:

1. An estimate of value establishes your starting line and distance to the finish.

2. An estimate of value tells you where your unique race to your exit begins. Your job, whether your company is worth $500,000 or $50M, is to fill the gap between today’s value (the starting line) and the value you need when you exit (the finish line). Based on today’s value, your race to the finish may be shorter, longer, or perhaps much longer, than you expect. Once you know how far you and your business need to travel, you can begin to create timelines and implement actions to foster growth in business value.

3. An estimate of value tests your exit objectives

4. An estimate of value helps you to determine if your exit objectives are achievable. Let’s assume that you decide that your finish line (financial objective) is to receive $7,000,000 (after taxes) from the transfer of your business interest. You also want to complete your race in three years (timing objective). An estimate of value will tell you if the distance between today’s value and the finish line is too great to reach in three years. If a growth rate is unrealistic for your business, you must either extend your time line or lower your financial expectations.

5. An estimate of value provides important tax information.
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