Exit Planning and the Significance of a Business Valuation

CPAs & Advisors

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Exit planning is a topic many business owners seem to shy away from. Many know at some point they will eventually come to this, but sometimes it can be too late, or not properly executed for the owner to receive the maximum benefits of a well-thought-out exit strategy. Many owners are so occupied with managing and running day-to-day operations, they often don’t make the time to sit down and come up with a strategic plan for exiting the business, or passing the business on. When the time eventually comes, sometimes it is too late to maximize value for both the seller and the business itself.

The Exit Planning Institute says that 70 to 80 percent of businesses put on the market end up not selling. This can be caused by a variety of reasons, but the most common is the value owners place on the business. Ninety-five percent of merger and acquisition professionals believe that business owners have unrealistic expectations when it comes to selling their business. That is why a business valuation can be the most important step in the process. The business owner can not only be educated on the value of the business, but also the factors that make up the value. It is important that owners are educated on the factors that generate value. This will help them reconcile the valuation number and the number they originally assumed. Knowing the correct factors like risk percentages, discounts, and normalization adjustments can help owners understand everything that needs to be considered in the sale of the business.

After this step has been completed, owners can determine what the next step will be in the process. They will need to determine the cash flow effects a sale would have on their tax situation and their lifestyle, and potentially plan for retirement, or decide if it would be better for them to wait a few more years. They can continue to receive a salary and earnings from the company, and sell in a few years, or decide to grow the business to achieve a higher sales value in the future. Becoming educated on the factors that impact the valuation can help owners determine changes in the business to create a higher sales value in the future.

Attaining a business valuation is the first, and possibly the most important, step in the exit planning process. Sometimes owners wait too long, and do not receive the maximum benefits they could have received if the process had been planned earlier.

If you would like to discuss the factors that impact the valuation of your business, contact Yeo & Yeo.

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