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Valuing a Business as Part of a Personal Financial Plan

April 11, 2013

Transparent Piggy BankA person who owns a business will occasionally have to value it.  One of the main reasons for valuing a business is to plan for the owner’s long-term financial security. Unless the value is understood and used properly, misleading information can have deleterious effects.

The value in a financial plan can be based on a realistic amount that would be received if the business were to be sold.  This could be misleading if the sale proceeds  are not reduced by taxes, broker’s commission, professional fees and other costs, such as extended liability insurance or staff bonuses, to encourage remaining with the business for severance pay.  Further, the sale might not be all cash.  A substantial portion could be paid with notes,  based on future profits, or client or customer retention.  There might also be requirements for the owner to work in the business for an extended time.

The financial plan should also focus on the cash flow the seller can expect to receive from the business if it is not sold and/or if they stop being fully active as well as from the net proceeds from a sale.

The financial plan has a purpose and many times that purpose is overlooked and the value used serves the owner’s ego rather than the practical aspect of the plan, which is to be used as a tool or goal for future financial security.  It should not be a self-serving exercise.

One Comment leave one →
  1. Robert Nagler permalink
    April 11, 2013 12:44 pm

    I think all your Partners notes are timely and interesting

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