How to find your business's hidden value and unlock its potential

Getting lost in the weeds is an occupational hazard for business owners. Every day, there is just so much to do: dealing with your team, customers and suppliers, overseeing operations, and making what can feel like a million decisions, big and small, just to keep the lights on. Even for seasoned entrepreneurs, it’s easy to lose sight of the goal to be an independent businessperson: creating value—for themselves and for their families.

1. Understand your business’ value.

If you’re like many business owners, you might think you know what your business is worth. But what is your estimate based on?

Owners will often look at how much other owners of similar businesses earned when they sold, “and that can give them a rough idea of what their own business might be worth,” says Kinnear. Yet the reality is that every business is different, so comparisons with other sale transactions can only go so far in telling you what your company’s true value is. As well, economic conditions and the interest rate environment can change frequently, and they can have a big impact on value, too. Top-line revenue growth can also be misleading, especially for rapidly growing companies. “There are some very exciting companies that are growing hundreds or thousands of a percent a year,” says Kinnear. “But how is that crazy revenue growth translating into the bottom line, which is usually the biggest indicator of what your business is actually worth?”

To help business owners better understand their company’s value, the advisors at CWB Wealth take a proactive approach, checking in every year, ideally, to discuss the state of their business and future prospects. Working closely with the owner’s own advisors as well as other experts within the CWB ecosystem – including companies that specialize in providing valuation services for financial planning purposes - advisors like Kinnear review the current value of a client’s business.

The key questions they ask include “How do you value the business,” Kinnear says, “and what are the ways you can be proactive, both with your management team and with other professionals, so that the work you’re doing is focused on maximizing the value of the business for you?”

2. Know your “number”

How much you can sell your business for is one thing. How much you would sell it for is another. That’s your “number”—the price you would accept if you received an unsolicited offer for your company.

Knowing your number is important for several reasons, Kinnear says. One is that it establishes a goal line for the owner as they work to create value. “We work with business owners and other advisors, such as M&A specialists, to determine the number we think you can get now,” Kinnear explains. “And then we can help figure out whether, if you implemented some changes to your business, you could get your number plus more in two or three years.”

Another reason to know your number is that it allows you to plan for your other financial and life goals—investments, retirement, estate planning and philanthropy, for example. “If you figure, OK, you’re going to get this for the business, then we can help you invest in a way that meets your risk requirements while taking into account other sources of income,” Kinnear says. “Then we can look at other areas: helping family members attend university, for instance, or philanthropic donations or estate planning. Everything flows from knowing your ‘number.’”

Kinnear cautions that your number should be realistic, based on sound valuation principles and reliable data. “Often, the number a business owner has in their head is higher than the market is likely to pay,” Kinnear says. “Also, it is often a pre-tax number, which doesn’t present a realistic picture of how much cash they’ll have available after they exit. It’s important to work with a specialized tax professional who can estimate after-tax proceeds and ensure you have planned to structure the sale of your business in a tax-efficient way.”

3. Consider the double-dip exit strategy.

Business owners don’t have to sell their company all at once. In fact, a partial sale has become an increasingly attractive option for many owners—and for potential buyers, Kinnear says. “Especially since the pandemic, a lot of risk has been added to the future viability of many private companies,” he explains. “From a buyer’s perspective, keeping the owner in place may help maintain profitability and grow the business into the future.”

There is also a potential benefit for the owner. “Retaining a minority interest can give you two kicks at the can, so to speak,” Kinnear says. “You can get liquidity from the partial sale, and you still have money in the business that can further solidify the future for you and your family.”

Business owners who follow this “double-dip” strategy are usually motivated to grow the company, he adds, and working with new investors who bring additional expertise can provide a boost to profitability and growth. A partial sale may also meet the needs of owners who want to take more time to pursue personal interests. “It can be a great way for a business owner to stay on board, perhaps without as much responsibility, while still knowing their financial future is secure,” Kinnear explains. “And there’s also the opportunity to participate in future upside.”

Be sure to watch for part 2 of Wealth Essentials, on how to maximize the benefits of being a business owner.


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