Accounting for Value
When Should You Consider Having Your Business Appraised?
You can log in 24/7 to get a real-time tally of your personal investments or type your address into a search engine to get a solid estimate of your home’s value. But how much is your business worth? For many entrepreneurs, their business is their single largest asset. Still, owners often don’t have a clue as to the actual value of their enterprises.
If you’re hoping to fund your retirement with the sale of your firm or considering passing it on to your kids, find out its market value and the true worth of all your sweat equity.
Getting a professional appraisal of your business can be expensive, costing up to five figures for more complicated operations. It’s also time-consuming. Even so, it will be a necessary investment of money and time if you want to sell the business or if your succession plan includes selling company stock to family members or employees.
Building your estate plan around your business requires a certified appraisal. Whether you’re setting up a trust, taking advantage of tax-free gifting using company stock or planning to use stock to make charitable donations, the Internal Revenue Service requires a third-party valuation to quantify the applicable deductions.
You’ll also need a third-party appraisal if you want to:
- set up an employee stock ownership plan (ESOP)
- consider a merger or acquisition
- get a loan
- take on an outside investor
Even if you don’t need a certified appraisal, you should run your own calculations every year to track your personal return on investment.
One fairly simple formula begins with adding up your discretionary earnings, which include reported pretax earnings, salaries, any interest expenses paid and all personal expenses that run through the business. Most small businesses sell for 1.5 to 2.5 times discretionary earnings, according to SCORE (formerly known as the Senior Corps of Retired Executives). So if your discretionary earnings are $150,000, and you assume a multiple of 2, the value of your business is $300,000.
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“How to Value Your Business,” SCORE, May 10, 2013, found here: https://eastcentralohio.score.org/resources/how-value-your-business
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