Dollars and Sense: Why it is important to know the value of my business?
Before reading this article, we suggest you read our article on “Timing is Everything: When Should I Start To Consider Selling My Business?”
As a shareholder of a Canadian corporation, the value of your shares is an extremely important number to know. Many individuals know the value of their homes, cars, investments and other assets off the top of their head, but many business owners have no real understanding of the value of their business beyond the cash in the bank and maybe the value of some inventory or equipment. It is most likely that the value of the shares makes up a significant portion of your personal net worth and certainly a number you need to really understand.
Owning shares of your own company is a valuable personal investment for every business owner. It is no different than owning shares in a public company like Royal Bank or Lululemon, except, with a public company, those shares are actively traded on an open stock market where the value is always known.
As a private business owner, you purchase the shares of your company for a book value the same way you purchase the public company shares. Then, it is up to you personally to work on your career to grow the value of the company. As revenues go up, debt increases or decreases and assets evolve, the value of your company is always changing.
As life events occur such as going to the bank to obtain personal or business financing, going through a divorce, liquidating an estate, buying out a partner, or eventually preparing to sell your business, always having an updated value of your business is a key metric for every owner.
Another key reason why it is important to know the value of your business is directly related to succession planning. In order to maximize the value of your shares on an eventual sale of your business, you need to know early on in the planning process what the value of the shares is and what is causing the value to be high or low. Knowing the starting point will allow you to build a plan on how to make changes in your business to grow the value of the shares. When you are in a phased plan to prepare your business for a sale, every decision you need to make as a business owner should revolve around increasing the value of the company. Then, when you have worked to maximize the value, you will be ready to actively pursue a buyer knowing they will be paying top dollar.
Determining the value of the shares of your business can be a complex process. It has as much to do with science and art as it does accounting and finance. Knowing how a business is valuated can help you to understand the best strategy in working towards your succession plan. For further reading, we suggest you review our article, “Cashing Out: What is My Business Worth?”
Jared Burwell is the author of this article. He is the founder and director of Viros Group, a capital investment and financial management firm focused on business growth and succession planning. He has spent the last 20 years in public accounting with a primary focus on providing advisory services and financial oversight to a wide sector of small and medium-sized owner managed businesses.
