Almost 3 out of five small-business owners don’t know what their businesses are worth, according to a new survey by management consulting firm George S. May International.
This lack of knowledge can be a problem during this period when so few small and mid-sized Orange County businesses are selling. April sales were down 51%.
More than 40% of respondents said they thought a valuation should only be conducted upon the sale of the business. But that’s not the only reason for a valuation (Click on image for larger view):
Source: George S. May International
“The majority of our clients that go through a formal business valuation process are usually off with what they ‘think’ is the true value of their business,” says May Managing Director Paul Rauseo adding that in the past, business valuations were good for two or three years, but with the current state of the economy, an update to a certified valuation should be made once year.
Although 43% of owners surveyed said they plan to sell their businesses within the next 10 years, 58% haven’t had a formal business valuation done in the past year and don’t plan to have one done in the future.
“Many people feel that the current economic conditions will inhibit them from selling, but that is not the case for most people that properly plan the sale of their business,” Rauseo says.
“Understanding the factors that determine the value of any business will pay tangible dividends by focusing on ways to increase short and long-term profitability,” he adds. “Valuation methodology helps companies grow by showing if changes to assets or revenues are good or bad to the future value of the business. If your goal is to increase the value of the business, then having the means to measure your daily operations impact is essential towards that goal.”
The George S. May Value Management Solutions Group recommends business owners consider these five factors when valuing their business:
- Profitability of the Business. The business must generate enough profit to afford the debt service.
- Asset Allocation & Protection. Does the business owner use physical assets wisely, i.e., a funded depreciation account for equipment used, puts some profit back into the business to expand market, etc.
- Operations Protection. Can the business continue on if the owner is not present? The owner shouldn’t be working “IN” the business, but “ON” the business.
- A Strong Management team is in place.
- Contingency Protection for Owner and Key Employees. Death or disability protection to assure the business can continue to pay the loan off if something happens.
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