While some business owners think they know what their business is worth, others have no idea. You In fact Do you know how much a potential buyer would be willing to pay for your business?
According to RBC Business Succession Planning, Your Essential Road Map:
“It’s important to get a professional business valuation, as owners can grossly overestimate or underestimate the value of their business.”
Value is in the eye of the beholder and value is different under different definitions of value. Fair Market Value (FMV) is a great starting point, as it takes the perspective of a potential buyer and is a very common definition of value applicable in many situations.
Getting your business professionally appraised can help you think like a potential buyer. Here are 10 other benefits of having a professional valuation done on your business:
- Improve business value: A business valuation provides a benchmark from which to measure value enhancement, as well as helping to identify key value drivers. Documenting the increase in value over time will increase the attractiveness of the business, helping to maximize the price a buyer will be willing to pay for the business.
- Manage family wealth – Private businesses often account for a significant percentage of a family’s wealth. Business owners simply cannot manage and protect their family’s wealth without knowing the value of their family’s assets (including the business). A professional appraisal also prepares the family in case they receive an unsolicited offer.
- Pre-sale planning: Buyers will only pay the best price for the most attractive deals. A valuation can help the business become more liquid and easier to monetize
- Sale of business to third parties: used as the basis for negotiations with potential buyers (for example, determining the sale price, evaluating the unsolicited offer, etc.)
- Internal Business Transfer – Sets a price for a shareholder buyout, management buyout, or employee shareholding plan
- Tax and Estate Planning: Provides support for the value being transferred and acts as insurance for potential disputes with the CRA (eg, estate freezes, reorganizations, related party transactions, etc.). The CRA may ignore price adjustment clauses if it determines that no reasonable attempt at value was made at the time of transfer
- Life Insurance Coverage: An appraisal provides business owners with third-party evidence to ensure adequate life insurance (eg, key person or purchase/sale agreements) is in place. This in turn gives shareholders peace of mind and peace of mind that their families and/or businesses are sufficiently protected.
- Shareholder disputes: Regular business valuations allow shareholders to discuss and agree on the current value of the business before potential disagreements arise (i.e. full disclosure to all shareholders)
- Marriage Separation – provides support for business value to be included in the NFP statement for asset division
- Trustee / Executor Protection: protection against potential estate administration tax (EAT) reassessments
