How do you gauge the true value of your family business?

Understanding the value of your family business is more than just knowing your numbers; it's about comprehensively assessing its worth. When you look at your company, you see years of hard work and dedication. Your business is not just a source of income; it's a legacy, a community presence, and perhaps a family tradition. But how do you translate all of that into a monetary value? Whether you're considering selling, seeking investment, or planning for the future, knowing the true value of your family business is crucial. It requires a blend of financial analysis, market understanding, and recognition of your business's unique attributes.

1 Financial Review

The financial health of your business is the cornerstone of its valuation. You need to start with a thorough review of your financial statements—balance sheets, income statements, and cash flow statements. Look beyond the numbers to understand the story they tell about your business. Are your revenues growing? Is your profit margin improving? Analyze your assets and liabilities for a clear picture of your company's net worth. Remember, consistent profitability and a strong balance sheet can significantly increase the perceived value of your family business.

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Quan Ly

President and CEO of McRally | Growth & Profitability Advisor | Cross-Border Tax Advisor | Professional Speaker | Craft Beer Enthusiast
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This is a good starting point. Also question why you are trying to value the business? For what purpose? Are you trying to sell to a potential buyer? Succession planning? Are you trying to raise capital or take on debt? Or are you trying to do some financial planning / modelling? These questions might invite additional key considerations and required data points which ultimately impacts the narrative.

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Bernie Agin

Business Valuations - Attorney - CPA
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A major issue in a financial review is to be aware who the financial statements were provided for. If presented to a bank the financial statements may paint a rosier picture than actually exists. Tax returns? Early on in our training valuation professionals are taught that while the goal of a major business is to benefit the shareholders through dividends and growth in the price of shares, the goal of many small businesses is to pay as little in tax as possible. Before the analysis can take place it is absolutely necessary to determine if any adjustments need to be made.

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2 Market Position

Your business doesn't operate in a vacuum; its value is heavily influenced by its position in the market. Examine your market share, customer base, and competitive landscape. A strong market position can be a testament to your business's resilience and potential for growth. Consider how your products or services stand out, and think about the loyalty of your customers. These factors can add significant value to your business, as they represent stability and future revenue streams.

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3 Growth Potential

Investors are particularly interested in the future earnings potential of a business. To gauge this, you must assess the growth opportunities available to you. Is there room for expansion in your current market, or could you diversify into new areas? Evaluate the scalability of your operations and the adaptability of your business model. A business with clear avenues for growth and a strategy to achieve it will often be valued higher than one without.

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4 Intangible Assets

Intangible assets such as brand reputation, intellectual property, and customer relationships can be harder to quantify but are no less important. These assets often provide competitive advantages that are not easily replicated by competitors. Assess how these intangibles contribute to your business's success and how they might be valued by others. Strong brand recognition or proprietary technology can significantly increase the value of your family business.

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5 Succession Planning

If your family business is to be passed down through generations, succession planning becomes a key element in its valuation. The presence of a clear, structured plan for leadership transition can greatly enhance investor confidence and business stability. Evaluate the strengths and potential of future leaders within your family or company. A well-prepared succession plan can add value to your business by ensuring continuity and reducing the risks associated with leadership changes.

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6 Exit Strategy

Lastly, consider your exit strategy. Whether you plan to sell, merge, or hand over the reins to the next generation, having a clear exit strategy can influence your business's value. A business that is prepared for sale, with clean financial records and a solid management team, is typically more attractive to buyers. Your exit strategy should align with your personal and business goals, ensuring that when the time comes, the transition adds value rather than detracts from it.

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Nelson Tepfer

Co-Founder & CEO at ProCFO Partners
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This really highlights the point of this exercise, and perhaps should be the starting point. While it is important to consider all options when exploring an exit, understanding why becomes critical. A sale to a PE firm might deliver the highest number, while handing over to the next generation builds a legacy and will more likely keep the business intact. The value to these two 'buyers' will likely be very different. Every business owner exits their business one way or another. The only choice they have is whether it is on their terms or not. Every business should be run like it will sell, so you have the option to sell if and when the opportunity arises.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Quan Ly

President and CEO of McRally | Growth & Profitability Advisor | Cross-Border Tax Advisor | Professional Speaker | Craft Beer Enthusiast
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If it’s a business with a physical establishment, always make a site visit to observe what is going on. You might notice that certain things don’t add up or you might see hidden opportunities. Always consider conducting interviews with key personnel. There’s normally a gold mine of information that can be gathered. For example, you might witness that a manufacturing facility only operates 8 hours a day and halts activities at 4pm every day. You might see an opportunity to fulfill the export market or some demand that is best served in the evening hours. In that case, you could consider running evening shifts to capitalize on this opportunity.

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How do you gauge the true value of your family business?

1

2

3

4

5

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1 Financial Review

2 Market Position

3 Growth Potential

4 Intangible Assets

5 Succession Planning

6 Exit Strategy

7 Here’s what else to consider

Business Management

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How do you gauge the true value of your family business?

1

2

3

4

5

6

7

1 Financial Review

2 Market Position

3 Growth Potential

4 Intangible Assets

5 Succession Planning

6 Exit Strategy

7 Here’s what else to consider

Business Management

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