A valuation is a critical component to better understanding your business. Since your business is likely your most valuable asset, knowing its value and understanding how to increase the business’s value allows you to effectively manage growth, continuity, and succession planning. Below, we provide an overview of typical valuation engagements and how they can help you reach your professional and personal goals.
- Initial Conclusion of Value: This valuation calculates the equity value of your company. In our planning work, equity value allows us to determine the pre-tax amount of money the owner will have after paying off all liabilities. This value can help determine how well your assets are creating net cash flow and whether the current value of your business, plus your non-business assets, can support your post-ownership lifestyle.
- Buy-Sell/Shareholder Agreement Value: If your business is owned by multiple people, you should have a buy-sell or shareholder agreement in place. This type of agreement determines how your business is valued if a trigger event, such as death, disability, or divorce, occurs. The valuations for these agreements calculate the equity value of the business because the selling owner will receive the equity value of their ownership interest as of the valuation date. Having well-thought-out valuation parameters in these agreements can alleviate intra-owner disagreements during emotional transition periods.
- Gift/Grant Valuation: Some owners want to gift ownership to a child or grant ownership to a key employee as part of a succession plan. In this case, we will make full use of discounts for lack of control and marketability to calculate the equity value of the gifted or granted interest. Discounts can allow you to gift a larger portion of the business while using up less of your lifetime exemption or to grant a larger portion of the business with less tax liability to your key employees.
- Scenario Valuations: During the succession planning process, it is important to know the value of your business under various transition options. For example, you may wish to explore a sale to your employees via an ESOP or worker-owned cooperative. In this scenario, one strategy is to grant a portion of the business to the eligible workers to acknowledge their past contributions, and then sell the remainder of the business. We would calculate equity value and likely include discounts for the granted interest and potentially for the remaining interest if it was transitioned over multiple years.
- Seller’s Valuation: This valuation is determined as you approach the sale date and is based on the updated financials of your business. Seller’s valuations calculate both enterprise and equity value. Typically, there are no explicit discounts included in a seller’s valuation. The value that is ultimately paid to you depends on who is buying your business. For example, most sales to third parties are transacted at enterprise value, whereas most internal sales (e.g., family member) are transacted at equity value.
We talk to numerous dealers across the country, and we always encourage them to get an independent, reliable, unbiased business valuation from a firm that specializes in the LBM industry like we do at Stratus Wealth Advisors. Just like it is hard to take a successful hike if you don’t know where the trailhead is, we believe it is challenging to benchmark your business without knowing its current value.