Why your business needs a physical

Many executives of both public and private firms get a physical check-up once a year. Many of these same executives think nothing of having their investments checked over at least once a year – probably more often. Yet, these same prudent executives never consider giving their company an annual physical, unless they are required to by company rules, ESOP regulations or some other necessary reason.

A leading CPA firm conducted a survey that revealed:

  • 65% of business owners do not know the value of their business
  • 75% of their net worth is tied up in their business; and
  • 85% have no exit strategy

There are many obvious reasons why a business owner should get a valuation of his or her company every year. These would include partnership issues, estate planning, divorce, buy/sell agreements, banking relationships; etc.

No matter the reason, the importance of getting a valuation cannot be over-emphasized:

  • An astute business owner should know the current value of his or her company as part of a yearly analysis of the business. How does it stack up on a year-over-year basis? The value should be increasing not decreasing! A valuation might also point out how the company stacks up against its peers. The owner’s annual physical will hopefully show that everything is fine, but if there is a problem, catching it early is very important. The same is true of the business.
  • Lee Ioccoca, former CEO of the Chrysler Company said in commercials for the company, “Buy, sell or get-out-of-the-way,” meaning standing still was not an option. You never know when an opportunity will present itself. An acquisition now might seem out of the question, but a company owner should be ready, just in case. A current valuation may be as good as money in the bank when that “out of the question” opportunity presents itself.
  • One never knows when a potential acquirer will suddenly present itself. It could be a possible opportunity of a lifetime and an owner should not be caught flat-footed without being prepared. Time is of the essence and if the seller doesn’t have a current valuation in hand to check against the offer, it could very well be a missed opportunity. By the time it takes to gather the necessary data and get it to a professional valuation firm, the acquirer has moved on to other opportunities.

Having a company valuation done on an annual basis, or at least every few years, should be as secondary as the annual physical – it really is the same thing – only the patients are different.