Why Business Valuations Are Important

As a business owner in San Diego, you’ve spent most of your career focused on growing your company and may have delayed planning your exit and retirement. Planning for your next chapter requires proactive actions that will support your personal finances, business goals, and a successful exit. Obtaining an accurate business valuation is an important first step. 

What Is the Primary Purpose of a Business Valuation?

A business valuation can give you a clearer understanding of your business’s worth and highlight personal and business actions to mitigate risk, increase value, or enhance transferability. The formula for calculating business value is fairly simple:

Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) x Multiple (of tangible and intangible assets) = Value

Why Does Business Valuation Matter?

As a San Diego business owner, your business is often the most valuable asset in your net worth. Knowing your business’s worth brings clarity to decisions and their impact on both your business value and personal wealth. 

When planning your exit, these insights are crucial, as every industry trades at a range of multiples that vary depending on factors such as company size, industry, private capital market conditions, economic circumstances, and the availability of businesses in the industry. Private capital markets determine the range of multiples, with weaker companies trading at the lower end and premium companies at the higher end. What makes a company strong or weak is its intellectual capital and the various risks associated with its specific business.

When Should You Conduct a Business Valuation?

Various occasions may trigger the need for a business valuation, but we recommend conducting one proactively as a baseline and then periodically to monitor progress and identify areas for improvement. Viewing your business decisions through the lens of business value early on can help you better manage, protect, and grow your business’s worth. Other times to get a valuation may include:

• Five to six years out from retirement, giving you ample time to assess what needs improvement
• When responding to or negotiating with a buyer who expresses interest
• During succession, estate, or other transition planning, such as when a partner leaves the company or during a divorce

How Do You Conduct a Business Valuation?

Performing a business valuation and creating a system to maximize and monitor the valuation process is a crucial step:

• ​​Begin the process by obtaining a professional valuation. You can search for valuation professionals locally, with some specializing in certain industries. Please contact our team if you would like to connect with a valuation professional. 
• Determine how your business compares to industry benchmarks. 
• Continue performing valuations at regular intervals to determine if you are expanding value and moving into the higher multiples for your industry. 

If you are receiving a lower valuation, you can address the gaps and focus on the factors that will allow your company to be valued at a higher multiple within your industry. Gaps may include:

• Profit Gap: The profits you’re sacrificing by not operating at a best-in-class level 
• Value Gap: The difference between your company’s current value and the maximum value best-in-class companies in the same industry receive upon sale 
• Wealth Gap: How much you need to sell your business for to reach your financial goals

How Can You Increase Business Value?

The transferable business value is essential for aligning the sale with your personal goals. For example, to support your retirement, you may need to maximize profits from a business sale. You may do this through several strategies, such as:

Maximizing Business Value: Rather than focusing solely on income, business owners should focus on increasing overall business value. Consider key areas such as financial health, management and personnel, systems, risk management, growth factors, income streams, and industry benchmarks.   

Enhancing Intellectual Capital: Excelling in intellectual capital, e.g., competent talent, reliable customer relationships, technology and systems, recurring revenue, and brand values and culture, can help make your business more attractive to potential buyers. 

Protecting Business Value: Mitigating personal, financial, or business risks is essential to safeguard your established business value and build value. Failing to prepare for the worst could negatively impact your business’s value, as valuations are based in part on real and perceived risks from a buyer’s perspective.

How CCMI Helps Business Owners Manage Business Value

We recommend consulting with a retirement planning professional, ideally at least five or six years before your target retirement date to give you sufficient time to assess your situation and business value, explore your options and exit strategy, and avoid risks or missed savings and tax opportunities. 

At CCMI, we often guide business owners through every stage of ownership, helping them identify gaps, implement strategies to maximize value, and successfully exit their businesses. Our team can help you navigate:

• Life After Business Planning: Often-overlooked areas include how and with whom you’ll spend your time, find purpose, create community, and more. 
• Personal Financial Planning: We help determine how much you need to save and sell your business for to achieve your retirement goals, considering income requirements, risks, cash flow, gifting, long-term healthcare, and estate planning.
• Maximizing Business Value: We help manage the transferable value of your business, focusing on its financial health, management and personnel, systems, risks, growth factors, and more.

Contact us to learn more about financial planning for business owners in San Diego.

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