Business value

guest commentary by David Potts

How much is your business worth?

When I ask a small business owner how much they think their businesses is worth I find that it depends. It depends upon the context in which I asked the question. If the business owner is considering selling their business, their business is worth a lot. If there is a divorce in the works their businesses is worth very little. So how much is your business really worth?

Well, it really does depend. It just doesn’t depend on whether or not you are getting a divorce.

How much your business is worth depends on a multitude of factors. The value of your business depends on whether you own all of the business or just part of the business. The value of your business depends on your industry, whether the economy is growing or in recession, or whether the business owns a patent. There are many factors that influence the value of your business, but what matters in the end is how much a willing buyer will pay you to induce you to sell them your business. That amount is based upon the expectations of the future benefits of owning the business, benefits generally measured by future cash flows.

If you own a small business, the value of your business probably composes the largest part of your net worth. How successful your business is determines how well you live now, but it also can determine how comfortable your retirement will be … if your business is worth much when you are ready to retire.

When the last time you seriously contemplated how much your business is worth? For some business owners it’s only when they complete their personal financial statement for the bank. When they come to the line that asks for the value of their business interests, they pause, give it 30 seconds of serious thought, then make some wild guess that they think will make them look good for the bank. Determing the value of your business, at least a value based in reality, takes a bit more time and effort.

Executives of public companies, companies that are traded in the stock market, focus on increasing their company’s value. Generally an executive’s pay in a publicly traded company depends on the price of the company’s stock. Therefore, increasing the stock price is a prime objective. How well they meet this objective can be seen each day in the trading price of their stock.

In my experience, the value of a privately-owned business is not a prime objective for its management. The subject isn’t discussed much unless it’s time for the owner to retire and he wants to cash out. I would speculate that this is probably because of the difficulty of determining the company’s value. Since you tend to manage what you measure and it is difficult to measure an increase in a private company’s value without spending significant time and money, a serious analysis of business value is not completed on a regular basis.

Although private companies don’t have the benefit of daily market prices to determine its value as public companies do, they can measure the factors that cause a company to increase in value. Periodically these companies could spend the time and money required to determine their company’s value to see how well they are meeting their objectives.

If you are a business owner and you want to maximize your wealth, focus on increasing the value of your business. Make your business value a prime objective.

To help increase your company’s value, I plan to discuss how to increase its value in my next few commentaries on The City Wire. I will discuss what a qualified business appraiser considers when arriving at an opinion of value for a private business. I will discuss how a company’s growth and a company’s risk impact its value. What is goodwill? How do you measure cash flow? If you own a business or planning to start or buy a business, this knowledge can mean money in your pocket.

Stay tuned.

David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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