Small business owners and entrepreneurs are hard working with 70 to 80 hour workweeks. Yet sometimes these industrious, enterprising, individuals believe their sweat equity is equal if not exceeds actual dollars and cents. The reason for this gap between what is believed to be true and what is actually true is because there has not been a succession plan based upon an objective business valuation.
Recently I interviewed Mark Machnic who is not only a CPA, but holds additional credentials including CVA, CFFA, CFDP and CDFA and is the principal for Business & Matrimonial Valuation Services, LLC of Schererville, IN. Mark's expertise allowed me to ask him a series of questions specific to these two often ignored aspects of small business management:
Business valuation
Succession planning
Why is it so important to understand business valuation?
"Most people do not understand the true value of the business. From my experience, people think the business is worth the net income any given year. They fail to take into consideration the goodwill aspect of the business, past earnings, and projected future earnings. Also, the process of valuing a business involves comparing the subject company to its industry peers by utilizing various databases."
What part does business valuation play within succession planning?
"The business valuation can be used as a benchmark for succession planning. The projections made within the valuation can be used as a trigger mechanism for recruiting the most qualified employees and for helping train current employees for advancement into more responsible positions. The valuation can be used to set goals based on projections of future earnings."
What is the most consistent misunderstanding that business owners have respective to the value of their business?
"Most business owners do not take goodwill into account when valuing their businesses. They tend to focus on the tangible hard assets instead of some of the intangibles such as goodwill. They also focus on the current income of the company, not taking into consideration past earnings or the future outlook of the company."
Besides not knowing what their business is worth, what is the second most common mistake you observe with business owners and executives?
"From a valuation standpoint, business owners do not understand how to add value to their business. The goal of a business owner should be to build a successful business that will attract numerous potential buyers. They need to know how to increase the value of their businesses and also to "keep the house" in order at all times. A business owner never knows when someone will come in and make an offer."
Finally, what are some issues within the current economic environment that will require business valuations?
"Business owners or those in management roles may be looking to merge or sell during tough economic times. If the economy is causing a negative effect on a business, the owners look at their options. During tough economic times, the number of qualified buyers tends to decrease, making it more difficult to sell a business."
When you, as the small business owner, know the actual worth of your company, hire the best of the best (because your company can demonstrate that worth) and continually add value to your business, then you can be the Red Jacket in the sea of gray suits. Not knowing may place you with all those other failed businesses and you become one of the many and not one of the few to succeed.