Planning and Small Business Valuation

Chess pieces

Chess is one of those games where you can go from being on top of the world to an emotional pit in a short amount of time. Lately, one of the more frustrating things that happened during a game was what’s called a fork. A fork occurs when your opponent positions their pieces, so you must take a loss and can do nothing about it. You can see an example of a fork below where Black will lose their queen and likely the game due to a fork.

Forks happen constantly in our finances, relationships, business, and health. We choose between survival and taking a hit in one of these essential parts of our lives due to a lack of planning—something we regularly see in the small business world.

Risks

We have seen business owners fall victim to three risks when it comes to knowing the value of their business.

1. Undervalued Risk

We met with one business owner who wanted to move to the country and be around their kids and grandkids in retirement. However, they thought their business valuation was around $1 million, meaning they needed to work 3-4 more years before they could comfortably retire and make a move. Thankfully, they got a valuation and discovered their business was worth $5 million. Even though they didn’t sell right away (and didn’t get exactly $5 million for the business), simply knowing the approximate value allowed them to focus on family while they were working and helped them retire earlier than expected.

2. Overvalued Risk

One business owner came to us believing their company was worth “$5-10 million.” We referred the owner to a qualified business transition advisor, who was certain the business couldn’t be worth more than $1 million. This misplaced anchoring had encouraged the business owner to take life a little easier and not work as hard towards growing the business because they “had” a comfortable nest egg waiting for them. The rude awakening of having to work longer than expected was hard to swallow and could have been planned for if they had known this information beforehand.

3. Misplaced Effort Risk

Many business owners will focus 100% of their effort towards a subset of their business that isn’t life-giving to them and doesn’t improve company valuation. Every business is different, but be sure that the time, money, and effort you’re spending fulfill your expectations. A few examples of ways to improve business valuation are: build a growth plan, ensure the business can run without you there, diversify revenue, create predictable revenue/subscription, establish barriers between the competition, and take the time to clean up your books and records.

To avoid these risks, we walk alongside our clients for years as they make these decisions and help guide their resources to help them reach financial independence as early and pain-free as possible.

How To Plan Ahead

Your business is probably the queen of your chess board/financial life. While it may not be the most critical piece, it is an integral part to plan around and care for. If you haven’t already, it is important to find a starting point for your business valuation and the variables that most heavily impact this value. Make minor adjustments over time to leverage this asset to benefit your clients, employees, and your family. And if a life-altering diagnosis, family move, or passion shift comes up, you are well-positioned to adapt.

Where to get a business valuation

Every business has a different valuation based on its industry, revenue, profitability, complexity, barriers to entry, and many other variables. On top of that,  how people land on their business value ranges wildly, from word-of-mouth stories of similar businesses, industry blogs, back-of-the-napkin calculations, paid valuations, and free business valuations from companies like Viking Mergers & Acquisition. So prepare now because every business transitions at some point; it’s just a matter of when and on what terms.

Stephen Boatman

Guest Author: Stephen Boatman of Flat Fee Financial

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