Story of Napolean & (Business) Valuation
September 16, 2022
4:00 minute read – #BusinessSuccessionPlanning. Possibly the worst words an officer, partner, or owner can say when it comes to business valuation are, “I think”. As in, ‘I think the business is valued at ‘XYZ’ today.’ Why? Just look to Napolean for this answer.
In 1803 Emperor Napoleon, burdened by the concerns and costs of a revolt in Haiti and a pending war with Britain, raised some cash by selling the 828,000-square-mile Louisiana Territory to the United States for about 42 cents an acre in today’s currency. An example of making a quick valuation on something significant.
Often an advisor has to do the same for a long-time business owner(s) who concentrate too heavily on and overvalues personal and emotional attachments to the establishment; or maybe who, because they have never viewed the business “from the outside,” underestimates the worth of his or her firm. Unfortunately, the steps and thoughts needed to formally evaluate the value of a corporation come too close to the end.
Enter the need for large key-person life insurance policies. “Where did they come up with this value?” is the question an underwriter will ask from the top of a long list of important questions.
Thinking the value of your business is several millions of dollars isn’t good enough (even if you have years of industry experience, and you just know). The larger the number, the larger the need to cover that with life insurance, the more specific details an underwriter will require.
First, many consider what “might be gotten” upon its sale as a considerable asset in a retirement plan. Or second, a fair valuation is important to be sure the terms of any transition agreement are reasonable and equitable for all parties. Third, and perhaps related to transition planning, if the cost of purchase under any agreed buy-out event is to be insured, a good valuation will be necessary for financial justification of coverage with the carrier.
Formal valuations can be expensive. A thorough job could run as high as $20,000, give or take a few grand. The good news is that there are informal alternatives available that are adequate for the planning purposes mentioned for little to no cost and a minimum amount of time.
SOLUTIONS: We represent at least two carriers who, as a service, will do informal business valuations using just the data from a simple questionnaire and three years of the company’s financial information. The results assess the estimated worth of the company using several valuation methods common in the industry. Are in a format presentable for the business owners / partners and any tax or legal advisors involved. In addition, our support team offers assistance in the presentation of the findings to both the client and the related advisors.
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