NEW YORK ( TheStreet) -- Over the past three years I've found myself disagreeing with Warren Buffett more and more.
However, speaking to investors at
annual meeting this year, he finally said something I agree with: "If business schools could offer just one course, it would not be on stock trading, the efficient market hypothesis or modern portfolio theory. Rather, B-schools should be encouraging students to learn the boring, but critically important, discipline of business valuation."
| Warren Buffett
There are 27 million small business owners according to the Small Business Administration's 2009 census. I would posit just a small fraction of these actually know what their business is worth. Worse, typically, a small business owner has some 90% of their net worth tied up in the business.
This is a very dangerous bit of ignorance on the part of business owners. Reason: Ceteris Paribas, the federal estate tax exemption will fall from $5 million to $1 million at the end of this year. That mean if you own a business worth $4 million, upon death, $3 million is subject to federal estate tax as high as 55% or $1.65 million.
The possible end games are not pretty:
- Litigate with the feds over the value of your business. Remember, this is the same Fed that has been printing money for the last several years.
- Wipe out your liquid net worth to pay estate taxes owed on the business.
- Sell the business to pay the estate taxes.
What keeps many small business owners from understanding what their business is worth is the cost. A business valuation study done by a qualified professional can start at $10,000, and many times costs much more.
But now there's no excuse. New online service and software from companies like
make the process simple and inexpensive. I've helped clients get a handle on their estate-planning needs with business valuations that cost well under $1,000. Remember, when it comes to estate planning, one of the big questions you are trying to answer is whether or not you need $250,000 of life insurance, or $2.5 million. And to understand that, you shouldn't have to spend $10,000 or more.
Is there value from a full-blown study? Absolutely. But remember, the underpinnings of business valuations lie in time-tested formulas related to earnings, growth, assets and liabilities. Converting these to an algorithm preserves much of the integrity of conventional business valuation techniques.