When interacting with small to mid-sized business owners and their advisors, there is increasing evidence that “strategic” business valuations are being employed as a vital planning tool. A recent study indicated that over 65% of the total valuations performed in 2011 were “strategic” in nature, meaning they were requested by owners with no plans to sell within the next three years.
“The increasing number of strategic appraisals is confirmed locally at our three offices here in New Jersey,” says Achim Neumann, President of A Neumann & Associates. “The trend is that savvy business owners realize that they need to establish a baseline value for their business in order to then improve certain features of it.”
Simply put, there are generally two types of business valuations. “Transactional valuations” are utilized for a sale or transfer of ownership, and “strategic valuations” are established to determine the key factors driving the value of an operation. While both types of appraisals are essentially the same in that they represent an independent third-party, fair market value of the company, the difference lies in the way that the client uses the valuation information.
For a business owner not looking to sell, there are various motivations for obtaining a business valuation. We increasingly find business coaches, financial planners, estate attorneys, wealth managers and CPAs suggesting that their clients look into the business appraisal process for the purposes of family succession planning, partnership buy-outs or disputes, business expansion and long term exit strategies.
“Over 85% of business owners do not really know what their company is worth,” notes Gary Herviou, Director Marketing, Central New Jersey. “The business owners we speak with are recognizing that they must get a handle on this information in order to address certain concerns and put themselves in a position to ultimately meet their long-term objectives. After all, how can you get to where you want to be if you don’t know where to start from?”
It’s only natural for small and family-owned business owners to spend the majority of their time thinking about things such as short-term cash flow, personnel issues, customer satisfaction and the like. The wise businessperson however, also finds the time to look at the bigger picture by understanding what the true value of their largest asset is— the business itself.
“Typically, 80% of a business owner’s net worth is tied up in his privately held business, and it’s important that this asset is maximized in the long term” says Andre Dubbeling, Director of Marketing for South Jersey.
It’s here that the business owner truly benefits from a strategic valuation so he or she will have all the information required to succeed and effectively position their business for a sale ten or fifteen years out. The increasing demand for strategic business valuations is clearly evidence of this positive trend in the marketplace.