The market for selling small businesses improved slightly last year, but buyers typically still had the upper hand. The median selling price rose 3.3% to $155,000, while the median revenue for firms sold in 2011 rose by 6.7%.1
Lenders generally require a professional valuation before extending credit to owners and buyers. But even if a loan or a sale is not in your immediate future, a precise valuation could be useful for effective business, tax, and retirement planning.
Preparing for potential changes. When a firm with several owners has negotiated a buy-sell agreement, the buyout value should be updated regularly to reflect market conditions and the company’s financial position.
You may also need to seek a business valuation if you plan to implement an employee stock ownership or profit-sharing plan, or for litigation support in the event of a divorce or other type of legal dispute. For tax purposes, it may be necessary to use one of the specific valuation approaches considered acceptable by the IRS.
Conserving your estate. One way to help reduce exposure to potential future estate taxes is to begin transferring ownership of a family business to the next generation during your lifetime. An accurate valuation may be needed to help ensure that gifts of partnership shares conform to the annual federal gift tax exclusion (currently $13,000 per year, per person).
Protecting your wealth and your retirement. It’s generally considered risky for investors to hold more than 20% to 30% of their net worth in a single asset, but many entrepreneurs don’t think twice about having a much larger proportion of their personal wealth in their own businesses.2 Investing outside your firm could help insulate your total financial picture from risks associated with your business’s distinct market.
Understanding the true market value of your company may help you make more informed decisions about how much of your income you should save and invest for retirement. It might also lead you to adjust your portfolio in light of the performance of your enterprise and/or your retirement goals.
1) BizBuySell.com, January 4, 2012
2) The Wall Street Journal, December 17, 2011