Why You Should Know the Value of Your Business (Even If You Aren’t Planning to Sell)

calculator-calculation-insurance-finance-53621.jpg

Your business is likely the most valuable asset in your financial portfolio.  In fact, studies show that 80% of individual wealth comes from the sale of businesses.  When you think of it like that, it’s obvious that you would want to know the market value of your business.

Another way to think of it is to compare it to managing your retirement fund.  Although you may be years away from retirement, you contribute to your retirement fund, spend time managing it, all with the ultimate goal in mind – to one day have the means to retire.  Like a retirement fund, you are constantly contributing to and managing your business.  It is important to know what your business is worth so you know how to grow it's value.

Here are three reasons it’s important to know the value of your business today, even if you aren’t planning on selling it:

1. You need to know where you’re starting from.

Before you start a journey, you must know your starting point.  This is true whether that is trying to lose weight, take a family road trip, or reach your financial goals.

This goes for your business as well.  Regardless if you plan to sell your company in 3 years, 30 years, or never, you need to know what it is valued at today in order to get where you want to go. 

Knowing the value of your business arms you with knowledge that will change how you think about your business and is the first critical step to making it more valuable, regardless of your plans to sell it.

2. You need to know your end goal.

For most business owners the idea of how it all ends is not something we like to think about.  “It will all turn out,” we whisper to ourselves.  But will it? 

One of Steven Covey’s 7 Habits of Highly Effective People is to “start with the end in mind.”  This means that if you want to get someplace, you must also have a clear picture of where you want to end up.

It is a healthy exercise to picture the end of your business, even if it does take some courage to ask the hard questions.

Do you see yourself sometime in the future walking out the door for the last time, turning off the lights, and locking the door to the business?  It just ends.

Do you see the business transitioning to a new generation - whether that is a family member or a new entrepreneur - who is willing to grab the baton from you and continue the work you started?

In the book, Built to Sell, John Warrillow emphasizes the importance of knowing the specific number that you want out of your business.  He even stresses that you write the number down and put it into a sealed envelope so when the day comes that you are deciding whether or not to accept an offer, the note will ground you in reality. 

It’s not enough to say, “I want to have enough to retire.”  Or, “I want enough to pay for a new home.”  You need to identify a specific dollar figure you want to get out of your business.  Now, this number might change over time, but having the specific number will help focus your efforts.  It will give you a clear target.

Without knowing your business’ current value, it’s hard to come up with a realistic future value.

3. Then, you can create a plan.

Knowing your starting point and end goal will change how you think about your business.  It will no longer just be about keeping the lights on or making marginal improvements over time, you will more clearly see the big picture.

Knowing where you need to get to reach your end goal helps you anticipate what areas need to grow to reach your goal.  For example, maybe your business currently generates $1 million in revenue with 10 employees, equaling $100,000 in revenue per employee.  If your end goal requires you to reach $2 million in revenue, that means you likely will need to double your number of employees.  Or, it might mean that you need to find ways to generate more revenue per employee.  Either way, you are now looking at your business in a way that you likely never have before.  Discoveries like this stir the ideas and actions needed to get to your target.

Without this mental road map, most business owners will simply plug along year after year going down the same path. 

As a business owner, you’ve probably already made the decision to run your business for the next 5 – 15 years.  Why not use those years to not only provide a living but also increase the value of your company?

By knowing your starting point, selecting an end goal based on this number, and putting in place a plan to reach that goal, you are well on your way to creating a highly valuable company. If you don’t sell your business, you will find yourself with a healthier, more autonomous company that is more enjoyable to run.  If you do sell your business, you’ll end up with a higher return than if you had not gone through the process of finding out the value of your business.