Billionaire investor Warren Buffett once told an audience at a business school graduation that business valuation was the most important course that they could take. He’s right — understanding the worth of your business gives you a tool to measure profit, achievement and loss.
Business value should form the basis of any informed decision regarding expansion, and succession planning and achieving maximum value upon exit, yet it is a skill that few financial advisors possess. According to the SBA Office of Advocacy, there are almost 30 million small businesses in the U.S., with CNBC estimating that a third of these will embark on the sales process in the next 15 years. Despite this huge market opportunity, there are only 7,800 certified valuation professionals in the U.S. according to the NACVA. It’s clear that something doesn’t add up.
CNBC’s study revealed that more than 10 million businesses will change hands over the next 10 years in the U.S. alone, with 78 percent of small-business owners planning to sell their company to fund 80 percent of their retirement. Most business owners will be aware of the value of their home, car and even the accessories they carry, but according to a recent IBISWorld report study only 2 percent of business owners know the value of their biggest asset, their business.
It’s easy to understand why so few businesses know their worth. The business valuation process is often perceived as expensive, time-consuming and intrusive. According to Forbes, a traditional valuation can cost upwards of $10,000, last for several weeks and often involves the business owners being asked awkward questions and having to disclose confidential information. It is no surprise then that few businesses, least of all small businesses, have the resources or inclination to embark upon this process on a regular basis.
There’s clearly a huge market for business valuation, so why are there so few certified business valuation experts? Traditionally, few trained to become business valuation experts because the training was costly and time intensive; taking an average of 10 years of practical experience to become a member of the Institute of Business Appraisers. Most certification programs are still “classroom” based with physical locations and manuals, making the added cost and complexity of travel difficult as well. It is also likely that the perception of business valuation as being the preserve of large businesses has wrongly led business owners and their advisors to think it is too complicated to tackle.
Today, things are different. The advent of big data and cloud technology has made business valuation available to all. It is now possible to ascertain a business’s worth at a tenth of the cost of traditional valuation services, and in a fraction of the time, making the intrusive nature of more traditional methodologies a thing of the past. Now every entrepreneur has an opportunity to know what their most important asset is worth. Financial advisors also have an increased ability to understand the nuances of business valuation thorugh online courses from NACVA’s (National Association of Certified Valuators and Analysts) Business Valuation Certification and Training Center and BizEquity’s Business Valuation Institute.
Real-time access to valuation data enables business owners to arm themselves with the knowledge needed to stimulate business growth and to capitalize on a wider range of opportunities An up-to-date valuation will assist entrepreneurs at every stage of their journey — when they are growing their business, when they are making structural changes and when they finally decide to exit. It’s no exaggeration to say that a valuation is the most important piece of information a business can possess.
It can be difficult for businesses to grow and develop if they do not have access to the right advice. Business value is at the heart of every business strategy, review and exit plan, so it makes sense that this should be an important component of an advisor’s skill set.
Without understanding business valuation, how can financial advisors, commercial bankers and insurance agents know they are giving their clients the best advice for their businesses? With the ability to undertake business valuation, advisors will be in a stronger position to help their business owner clients understand where they are today and provide them with a clearer path to their future while helping them achieve their goals. This type of knowledge is a right in the age of big data that should be shared, learned and grown, not a privilege.
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