If you are an owner or operator of a business, or a family member going through some level of estate planning, chances are you will need to understand and/or document the value of a business or business interest. Given that the preponderance of businesses out there are privately held, there is no immediate mechanism to easily ascertain the value of an ownership interest. As such, business valuations are needed to gain such understanding.
But what are business valuations? Why would you need one? And practically speaking, how do you go about getting one? Unless you went to school for finance, or have been through the process before, the answers to these questions may not be top of mind.
For a baseline, let’s jump into the What, Why and How of business valuations.
The What:
A business valuation, also referred to as a business appraisal, is a process used to estimate the economic value of an owner's interest in a business – valuing either 100% of the outstanding equity or a percentage of the whole. A valuation provides a measure of the company's worth based on a variety of factors such as its financial health, cash flow, market conditions, balance sheet characteristics, and potential for future growth.
Equally as important as the factors listed above, a valuation also incorporates, and is highlight sensitive to, the assessment of risk. Naturally, one would think a highly profitable company would be worth a lot, but if that profit is highly speculative (for whatever reason), value will be invariably subdued. Put another way, the risk input in a valuation can be either a catalyst or governor.
Business retirement plans are tax-deferred savings vehicles for owners and their staff.
We introduced readers to the complex world of employer-sponsored plans in Article 1 of this series.
This installment offers a decision-making framework for business owners.
Many retirement plans are available to business owners. The number of options can be overwhelming. Stringent regulations and recordkeeping requirements introduce an added layer of complexity. Fortunately, a systematic approach makes the selection process more manageable.
Plan adoption involves several interrelated steps. Goal setting is perhaps the most important action. This requires the company to decide who will participate, which party(ies) will contribute, and how much it would like to provide. By defining clear objectives, the owner can form a list of plan options. Next, businesses should review the responsibilities and costs associated with each option. Companies then choose a plan that best meets their criteria. Once a selection is made, owners prepare documentation, select investments, and implement the plan.
This article provides a decision-making framework for business owners. In reality, companies typically leverage outside professionals throughout the process. Investment professionals, third-party administrators, and attorneys all offer important services in this area. Regardless, an informed business owner is also a judicious one. A knowledgeable plan sponsor can mitigate costs and avoid headaches.
BaldwinClarke offers over fifty years of business planning experience. We proudly serve as a consultant and advisor for plans of various sizes. Our methodical process prioritizes education and objectivity. This fosters trust and allows business owners to focus on what they do best.
