Understanding Business Value

A successful Exit Plan results in the business owner exiting their business with the financial resources to meet their future needs. In Step Two of The BEI Seven Step Exit Planning Process™, Exit Planners work with business owners to quantify the value of their assets as well as the financial needs of the business owner following the sale of their business. Once each of these has been quantified, Exit Planners can determine whether there is a gap between them. If a gap exists, the Exit Planner can create a plan to close that gap.

Assessing the gap is an essential step in creating a successful Exit Plan. This paper will focus on one aspect of assessing the gap: the benefits of a business valuation when determining the value of what is typically the business owner’s largest asset—the interest in their business.

Ascertaining the value of a business owner’s assets is paramount if an Exit Plan is to be considered successful. It is common to hear Exit Planners state that business owners know the value of their businesses. It is also common to hear Exit Planners state that a business owner’s estimate of value turns out to be materially different than the actual transaction price at exit. Uncertainty about the value of the business interest can materially increase the probability that a gap could arise at exit and leave the business owner without the assets needed post-exit. A quality business valuation can improve the probability of a successful exit event, since a gap can be identified and a plan to eliminate the gap can be prepared and implemented. In addition, preparation of a business valuation will use approaches that are consistent with that of a financial investor.

Therefore, completion of a valuation years before the planned exit event can be an excellent practice run to experience the due diligence process that a potential buyer would typically complete. The valuation also provides comparisons to benchmarks that may assist the business owner with identifying opportunities to increase the value of their business during the years prior to their planned exit date. As such, the bench marking completed as part of a valuation may be a key part of developing a plan to address a gap. Let’s discuss a few common valuation methods, along with the advantages and pitfalls of each