How much is your company worth?

In dealing with many small business owners over the years, I would invariably ask them a simple but very important question: how much is your company worth? The typical response would be a blank, quizzical stare. The average business owner knows his business intimately, including how much money the business makes. However, the valuation of the business may not be something they have thought deeply about. But what is a business valuation and why is it important?

A business valuation is a process of determining the economic value of a business. There are a variety of purposes an owner may need a valuation for. The more common ones are: the owner may want to sell the business; establishing partner ownership; taxation; divorce proceedings.

In the case of divorce, if a business owner is facing the dissolution of his/her marriage and he/she does not have the cash or other assets to compensate their spouse according to the terms of the divorce, the company may have to be sold to pay the spouse. An empirical example of such an outcome was Bob Johnson, the founder of BET. In 2000, Bob Johnson sold BET to Viacom and netted 1.3 billion dollars in Stock in the new BET. His Spouse, who was a partner, filed for divorce that same year. Mr. Johnson, allegedly, had to liquidate his business to pay his Mrs. Johnson $400 million to satisfy the divorce terms. He promptly fell out of the billionaire bracket.

In Mr Johnson’s case, he probably knew the value of his company because it largely consisted of stock in a publicly-traded company. But for many business owners, it may not be so cut and dried. Some astute business people plan for eventualities such as these. They may save money in an escrow account, or they could set up Buy-Sell agreements funded by insurance policies that could protect the company if a partner dies or leaves the company. Such agreements help by providing an alternative to dissolving a company to pay former partners.

-Chester Peters