“How much is my business worth?” - We often get this question from hard-working clients who are also small business owners. I wish the answer could be as simple as a number that I can just throw out there to suit the client’s needs for whatever purpose but the answer to this question is far more complicated.
The value of a business
When it comes to business valuation, the ideal method would be just like the valuation of a real estate, using the price of a similar sale on the market. While there are more than enough comparisons on the market for real estates, for small businesses few of them can be compared to each other.
You can easily find similar sized and conditioned houses in the same neighborhood and there are always houses on and off the market for you to observe pricing.
With businesses, other than the measurement of some tangible traits such as the location and size, a list of other factors are far more vital for the valuation.
- Business model
- Customer profile
- Sales process
- Internal system
- Vendor relationship
- Comparative advantages
- The market
- Reputation/goodwill
- Owner’s production and involvement
Everything mentioned above are all integral parts of the business valuation. Some measurements are as objective as just numbers, such as revenue, margins and EBITDA. Other measurements are more of analysis, descriptions and professional perceptions which are aimed to be as neutral and objective as possible. Therefore, different business valuation experts can often come up with different values for the same business.
However, since business valuation is an expensive professional service not many small business owners can afford to have multiple valuations done, therefore they are usually not aware of the subjective-ness of the valuation. More importantly, the value also depends on the acceptance of the buying parties. If there are no buyers for the business at the valued price, the valuation is just meaningless.
I am not going to explain the business valuation process here as the goal of this blog is for small business owners to know the difference in the valuation of their businesses with and without them.
Owner’s involvement
Business owners work hard, day and night to build an enterprise as opposed to keeping a day job. I am certain most people know the differences between owning a business and having a job. However I almost never get asked by clients how much their business is worth without them working in it. The reason for this question is something small business owners often overlook.
Over our combined 30+ years of serving small businesses, we have witnessed many entrepreneurs create a business to support their families, dreams, communities and retirement eventually, but not many have a sustainable and scalable enterprise that can run when the owner is absent. When the owner is irreplaceable or the business requires a key person to work in it all the time, the value of the business is as little as a job on the market. The higher the pay is, the harder you need to work.
It should not surprise anyone when a business with the owner heavily involved in all aspects of the operations is valued significantly less than another business with a team of personnel and a consistent and scalable internal system in place. The following two stories can paint a picture of what they both look like.
Jerry is a highly skilled engineer who has sole relationships with his clients. They would only communicate with Jerry regarding the needs of their industrial systems. Jerry sells, designs, implements, oversees and fulfills the jobs. On top of that, Jerry creates and delivers invoices to clients. For late payments, Jerry would personally follow up with the clients. Jerry also makes purchase orders for jobs and pays bills as the only signer of the business checking account. Jerry has his son and wife working for him along with several other employees but Jerry has always been the key person making all decisions.
Phil is also an engineer. Phil has a team of members who are filled in on the operations at every level. They work together and are aware of the important business decisions made. Phil serves both industrial and residential customers and he has SOP’s (standard operating procedures) in place that are followed by his entire team. He delegates administrative tasks to employees so he can grow the business and help his team grow.
Even though Phil has a lower profit margin than Jerry does because of the investment he makes in his team and processes, the value of Phil’s business can grow exponentially while Jerry’s only increases when he works more.
If both Jerry and Phil walk away from their businesses, Phil’s operations would continue like a well-oiled machine while Jerry’s staff would be lost and end up with a ton of problems to solve.
These two stories might be a little extreme but they are true stories. As business owners you need to spend the time and reflect on your processes constantly. When you first start a business you might operate like Jerry, but you should always have a goal for your operations to be like Phil’s if your exit strategy is to have a turnkey business sold for what it is worth.
Work with a Professional
If you have a business and are in the process of selecting a tax professional, we recommend you work with a professional with CPA credentials so that you and your business can be protected from losing vital data and overpaying taxes as a result. This happens very frequently and is something we have helped our clients with in the past. If you are looking to make the change but are intimidated by the process you can always reach out to our firm at info@rschwartzcpa.com . We look forward to speaking with you and assisting you as you look to make the right decisions when it comes to your business.
HOW SCHWARTZ IS HELPING SOUTH JERSEY SMALL BUSINESS OWNERS
Navigating these legal changes and what it means for your small business in New Jersey can be one of the biggest challenges you face in the coming years. Fortunately, Schwartz & Associates is already familiar with relevant tax laws and regulations you need to comply with, including the impact of the Biden Administration's new tax proposals. The American Families Plan (AFP) and American Jobs Plan (AJP) will bring with them new taxes on businesses in the coming year, and Schwartz is prepared to ensure your South Jersey business is not only in compliance but maximizing its benefits.
Contact us for more insight into what these changes may mean for your business specifically and what we can do to ensure you're getting the most out of your deductions.
