True Value: The $1 Million Elephant in Manufacturing Businesses
Most agree that the value of a business is significantly important. Yet value is often the $1 million “elephant” that goes ignored year after year.
A business valuation may arguably be one of the most critical numbers an owner needs to know because of its impact on so many areas within an organization. Understanding your true value number sooner rather than later will provide opportunities to affect the future of the business. This type of anticipatory approach allows owners to plan well in advance of an exit for greater success.
FACT #1- All Business Owners will Exit the Business
As an owner, there will come a time when you won’t be running the business anymore. And while the timing is different for everyone, one universal thing is that you can’t sell your business in a day. Whether it’s a merger or an acquisition, this type of transaction may be the biggest one of your life and provides future freedom for you and your family. The more time you give yourself to plan, the more options available, including:
- Next-generation family ownership
- Management team takeover
- Building an ESOP
- Increase the value of the business for outside purchase – strategic buyer
In our work with manufacturers who are exploring ownership transition, we know it is a time of uncertainty for many, but it doesn’t have to be. With the right resources, you can plan an exit that positions your ownership transition to meet both your professional and personal goals.
FACT #2- Your Business Valuation Should be Checked Regularly
Many owners believe that a business valuation should only occur for compliance reasons such as gift and estate planning, litigation, or financial statement requirements. But what’s similar about each of those examples is that they all look back at the business and a moment in time.
Business value goes up and down, and it’s something that should be checked regularly. It’s similar to having your weight and blood pressure checked during an annual doctor appointment. Month-end and year-end statements may give you clues about the value. If you are losing money, your business isn’t growing. But say you just invested in a new machine; how does that impact your business value?
FACT #3- Business Valuation is Part of Strategic Planning
Many business owners regularly look at where the business is headed in terms of gross sales, net revenue, and employee count. Strategic planning is a best practice of how to shape the future. The business valuation should be part of that strategic plan. Understanding the baseline figure allows you to make strategic decisions for the future.
If you want to sell the business in 10 years, determine what you could do now to significantly increase your business’s value. Becky Carlson, Director of Value Advisory at SN, says, “Knowing and understanding value is critical during each stage of your business lifecycle. When a company is ready for a transition, our goal is to help the buyers, sellers, and the company succeed.”
At Stambaugh Ness, we think differently about value and apply a forward-focused approach. A small investment now to understand your true value can allow you to help increase that value and plan for a more prosperous future.