How Much Is My Business Worth?

In this fourth installment of The Business Owner’s Guide to Maximizing Business Value: Steps for a Profitable Exit, we’ll tackle one of the most pressing questions business owners face: “How much is my business worth?”

For many owners, their business represents years of effort, personal sacrifice, and financial investment. Naturally, this creates a deep attachment, and with it, high expectations of what their business is worth. Unfortunately, these expectations are often unrealistic when compared to what buyers are willing to pay. This disconnect can lead to disappointment and missed opportunities unless addressed early.

To accurately assess your business's worth and plan effectively, you need to understand the valuation process and your options for determining value. 

How Much Your Business Needs to be Worth

Many business owners equate the value of their business to how much they’ll need for retirement—what we call the Wealth Gap. Don’t make this mistake. The Wealth Gap represents the difference between the amount of money you will require to achieve your retirement goals and the estimated proceeds from your business sale after taxes, fees, and other costs. Potentially two very different numbers. Obtaining an accurate valuation is the first step in this process.

Valuation Methods: What Are Your Options?

There are several ways to determine your business’s value, ranging from informal estimates to detailed certified appraisals. Here’s an overview of your options:

1. Certified Business Appraisals

A certified business appraisal is the most comprehensive and detailed method for valuing your business. Conducted by a licensed business appraiser, this process considers a variety of factors, including financial performance, market conditions, and comparable sales.

• Cost: Typically $10,000 to $15,000 or more
• Use Cases: Required for gifting, estate planning, implementing Employee Stock Ownership Plans (ESOPs), shareholder agreements, or divorces.
• Benefit: Provides a formal, defensible valuation backed by industry standards.
• Consideration: While not necessary for sales, a certified appraisal can provide valuable insights into your business's worth.

2. Calculations of Business Value

For many business owners who plan to sell in the future, a less formal estimate of value is sufficient during the early stages of planning. These estimates are typically prepared by CPAs, business brokers, or advisors.

• Cost: Typically $3,000 to $5,000
• Use Cases: Ideal for initial exit planning, estimating current or baseline value, and identifying strategies to increase value
• Benefit: Offers a quick and affordable way to understand your business’s approximate worth
• Consideration: Not as detailed or defensible as a certified appraisal, but helpful for setting expectations and creating a growth strategy

Even if you’re not planning to sell your business in the near future, obtaining a baseline estimate of value can be an eye-opener. It allows you to:

• Identify areas for improvement
• Track growth over time
• Determine if your current value aligns with your financial goals

A baseline valuation helps you understand how far you need to grow to bridge your Wealth Gap and achieve a successful exit. But first, be sure to share it with your CPA who can estimate the taxes and fees you will have to pay if you sell.

When Should You Seek a Valuation?

The timing of your valuation depends on your goals and circumstances. Here are some key milestones where a valuation might be essential:

• Early Exit Planning: Establish a starting point for your growth strategy
• Major Life Events: Divorce, estate planning, or implementing an ESOP
• Preparing for Sale: Ensure your expectations align with market realities
• Monitoring Growth: Track the impact of efforts to increase business value

If you’re considering a sale in the next one to three years, obtain a baseline valuation and monitor it from there. 

Next Steps: Closing the Wealth Gap

Knowing how much your business is worth today is a critical step in preparing for a successful exit. But just as important is identifying the gap between your current value and what you’ll need to fund your future. Here’s what you can do next:

1. Obtain a Baseline Valuation: Work with a CPA, business broker, or advisor to get an initial estimate of your business’s worth.
2. Identify Growth Opportunities: Use your valuation as a roadmap to pinpoint areas where you can increase your business’s value.
3. Consult Experts: Seek guidance from financial advisors, business consultants, and exit planning specialists to develop a comprehensive strategy.

Understanding your business’s value is essential for making informed decisions about your exit strategy. In the next installment of The Business Owner’s Guide to Maximizing Business Value, we’ll explore practical strategies to enhance your business’s value and attract the best buyers. Stay tuned for actionable insights to help you achieve a profitable and successful exit.

Want to learn more now? In our guide Maximizing the Value of Your Business - Getting the Most You Can from the Sale of Your Business, we debunk common myths about business value and reveal:

• More than a dozen ways to professionalize your business
• The best way to prepare for buyer due diligence
• How to improve the quality of your business to command a premium price

Discover exactly what buyers look for in their acquisition targets and join an elite group of owners who have successfully sold their businesses!

Learn more