As a successful business owner, you know your business has value. It likely supports you and your family’s lifestyle and provides a paycheck and benefits to the people you employ.

But if someone asked you, “How much is your business worth?” could you confidently provide a dollar amount?

According to CNBC, 98% of small business owners‡ do not know the value of their business. Commonly, many business owners overestimate the value of their businesses, finding estimates based on rules of thumb, comparing what outwardly similar businesses have sold for, or simply a gut feeling.

Not knowing what your business is worth right now can have negative consequences for its future and your transition.

Valuation can guide growth

Business value can be indicative of how well (or whether) it’s growing. While factors such as gross sales and cash flow play an important role in determining business value, they aren’t the only factors. For example, if your business’ yearly cash flow is around $3 million, and the equipment and property the business owns is worth $1 million, you might assume the business’ value is around $4 million at the low end.

However, if your business’ cash flow results from two or three big clients, potential buyers may value the business below $4 million due to the risk of large losses if one of those clients leaves after a sale. Likewise, if you as the owner are the primary reason for strong cash flows, a potential buyer may reduce their assessment of the business’ value to reflect the cost and risk associated with you leaving. This is because if you were ever to leave the company, whether by choice or chance, revenue and cash flow can decrease or cease.

Even if you never intend to sell your business, its value is primarily based on what qualified buyers would be willing to pay for it.

In short, knowing what your business is worth right now—as a consequence of what you’re currently doing—can help you determine which areas of your business can improve to allow you to pursue your growth goals. Growth relies on numerous factors, some of which aren’t as obvious as hard numbers like cash flow. Awareness of these less obvious factors can get you thinking about and acting on strategies to potentially strengthen them in your business, which can help guide your business toward the growth you desire.

Value information can solidify planning

Without knowing what you currently have, it’s difficult to create a plan that allows you to pursue what you want and need. This applies to goals you may have for your post-business life, such as traveling more or spending more time with family or friends. It applies to goals you may have to leverage your business’ success as a force for good in the community, such as through charitable donations. It applies to estate planning goals you may have, like passing wealth to future generations.

Whatever your future goals may be, it’s difficult to plan for how to pursue them without knowing what you currently have and what you will eventually need. Being overly ambitious based on what you believe your business is worth can damage how the business functions. Conversely, underestimating what your business is really worth can focus your attention, allowing you to pursue important short-term and long-term improvements right away.

An accurate value gives you time to adjust

Growing business value to a point at which you can achieve your goals can take years. It’s rarely as easy a flipping a switch or making a small change, yet many business owners severely underestimate how much time it takes. This commonly leads to burnout, especially when owners view the challenge of spurring growth as insurmountable.

Knowing what the business is worth now can prevent you from burning out or staying in the business for longer than you want because it helps you determine how long it may take to build the business value to the right level.

Unless business ownership is merely a side project, the value of your business will likely affect you, the goals you want to pursue, and the people and causes you care about. An accurate and realistic valuation is the first place to start exit planning.

Interested in learning more about Private Wealth Management? With UMB, you have a guiding team that walks you from financial advising and investment portfolio management to wealth-building strategies and retirement and legacy preservation plans.

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

Disclosures

Financial planning services are offered by UMB Private Wealth Management, a division within UMB Bank, n.a. that manages active portfolios for individuals, fiduciary accounts, employee benefit plans, endowments and foundations. UMB Bank, n.a., is a subsidiary of UMB Financial Corporation.

This material is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities or engage in any specific investment strategy. Statements in the presentation are based on the opinions of the author and are subject to change at any time without notice. You should not use this presentation as a substitute for your own judgment, and you should consult the appropriate financial professional before making any tax, legal, financial planning or investment decisions.

Securities and Insurance products are:

NOT FDIC INSURED | NO BANK GUARANTEE | NOT A DEPOSIT | NOT INSURED BY ANY GOVERNMENT AGENCY | MAY LOSE VALUE