Retirement planning has a number of challenges, and creating a strategy to exit your business is one of them. Your secret weapon through that process? An easy and accurate valuation of your business.
Knowing your business value is useful throughout the life of your business, but it’s especially critical when you’re planning your transition into retirement. Your valuation can help guide you to make the right decisions as you sell the company or transfer it to someone else.
In this article, we explain why knowing the market value of your business is so important as you approach retirement.
Valuations Help You Choose an Exit Strategy
There are many different ways you can exit your business. Some of the most common business succession options include:
- Closing the business and liquidating the assets.
- Selling the business in its entirety to a family member, an employee, another entrepreneur, or even another company.
- Selling shares of the business—either your entire stake or only part of it.
- Gifting the business to members of your family.
- Transferring management of the business to another individual but maintaining your entire ownership stake.
With so many options, it can be difficult to decide which is right for your needs and circumstances. But it’s easier to make that decision when you know how much your company is worth.
For example, if its value is high, you might decide against closing down the business or gifting it. Instead, you might opt to sell it. On the other hand, if the value is quite low, it may make more sense to simply liquidate the assets.
If the value is quite high, you may only need to sell part of the business to meet your financial goals for retirement, so you might choose to maintain an ownership stake. That stake can then provide you with a consistent retirement income. But if the value is a bit lower, you may need to sell the entire business to meet your financial needs in retirement.
In each case, knowing the value of your business helps you decide on which exit strategy is right for you. It can also help you understand when it’s the right time to move into retirement.
Valuations Help You Set a Sale Price and Evaluate Offers
Another important reason to get a business valuation is to help you determine a sale price.
It is crucial to set an appropriate price for your business. You want to ensure that you’re fairly compensated for the successful company that you’ve created. But you also want to set a price that a buyer would actually pay.
Knowing what a business is truly worth helps you strike that balance. And it can also help you evaluate potential offers. In the case that you choose to sell only a part of the business, the valuation can help you set the price of shares of the company or even set up a plan for employees to become stock owners.
You want to make sure that you’re properly rewarded for the thriving business that you built. To do that, you need to know what the business is worth.
Valuations Help Identify Value Drivers and Grow Your Business
If you’re well-prepared, you might even do regular business valuations in the years leading up to retirement.
This can be extremely valuable for business planning. For example, a business valuation can help you understand the factors that are contributing to the value of your business. Similarly, you can also identify the features of your business that are reducing its value.
That information can help you make operating changes that maximize value in your last years at the helm and potentially allow you to sell at a higher price.
Valuations Help Set Targets for When you Should Sell or Exit
How you exit the business isn’t the only difficult decision you’ll face. You’ll also have to decide when.
Of course, when you exit is up to you—but the decision could be informed by knowing how your company’s value is changing.
For example, if business valuations over the past few years show that your business is increasing in value, you may wish to hang on as an owner for a little longer. On the other hand, if the value is stagnant, there may not be any reason to delay a sale. And if the value of your business is decreasing, you may wish to sell sooner rather than later and put the money into an IRA or other investments.
Regular business valuations can help you to plan and set timelines for your exit.
Valuations Are Useful for Tax Purposes
Succession planning often involves a number of complex considerations, not the least of which is taxes. To complicate matters, the type of taxes you’ll pay depends on how the business is transferred or sold.
For example, liquidating your company’s assets will often have different tax implications than selling shares. Similarly, if you’re selling a business outright, you can often choose to implement an agreement so that the buyer pays it over several years. Spreading your sale earnings over several years could help reduce your tax burden. Alternatively, you may choose to set up a family trust or even gift the business. Each of those can provide tax advantages.
There are a number of different tax implications for selling a business and we can’t cover them all here. But, ultimately, the tax consequences of selling your business depend on its worth. To make an informed decision about how to sell your business, you may benefit from consulting with a tax expert in addition to conducting a rigorous business valuation.
Valuations Are Useful for Estate Planning
Another financial consideration for retirement planning is how to prepare your assets for the next generation.
If you’re like many small business owners, much of your wealth may be tied up in your company. You will likely want to consider how to protect that wealth and ensure that it is fairly distributed to your children or other family members when the time is right.
Knowing what your business is worth can help make estate planning less complicated.
Know Your Business’s Worth as You Approach Retirement
Retirement planning is exciting, but it can also be stressful—especially when you’re a business owner. It’s not just a matter of ensuring you’ve contributed enough to your IRA or have a diversified investment portfolio. You also have to think about succession planning—what to do with your business.
A clear idea of the worth of your company will help you plan for retirement and smoothly transition out of your company. Valuations make a difference—make sure yours is accurate.
Wondering how to determine the valuation of a business? Try GrowGrade. It uses your own accounting data to provide you with an accurate valuation in as little as 30 seconds.