It’s important to be honest here. For most business owners the value of their business is a complete unknown.
In calculating your business’ net worth you will need to consider:
- What do you have to sell (this could be customer contact lists, contracts, inventory, equipment, property, intellectual property, special licenses, etc.)?
- Are any of your special licenses or patents transferrable?
- Is your business more valuable in one or more pieces?
- What method will you use to determine fair market value?
- What can you do to improve the value of your business as you go forward in your retirement or succession plan?
The first step is to valuate your business, and there are three methods for determining fair market value:
- Asset-based approach — Total all asset and personal investments in the business to date. If possible, choose fair market values for assets.
- Market value approach — Look at comparable businesses that have sold recently and estimate your business’ value.
- Earnings approach — Use one or more years of historical or future earnings. If possible, use net present value calculations to discount the future cash flow.
Next, look at ways to improve the value of the business with the following methods. Devise ways in each area that will make a difference to your business value:
- Increase income?
- Improve assets?
- Reduce liabilities?
Often in a small business much of the real value rests in the owner’s realm of expertise, knowledge and intellect. If you (the business owner/manager) are planning to retire you will want to develop a plan for transferring knowledge, know-how and leadership responsibility. If your business is merely surviving and creating a job for the owner or just getting by day-to-day, it may not be worth more than the salvage value.
The next page in this section will discuss how to groom your successors.