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Incorporating Owner’s Equity Value into Financial Plans | RISR Encyclopedia for Financial Advisors working with Business Owners Incorporating Owner’s Equity Value into Financial Plans
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Value of equity owned

✨ In summary

Value of equity owned represents the value of the client's personal share of equity in the business, estimated by applying the client's ownership percentage to an estimate of the equity value of the business.

Value of equity owned explained

When financial planning with business owners, it's important to consider the value of the client's personal share of equity in the business. Financial advisors should first estimate current business valuation and then identify how much of that value is held by the client.

In cases where the client's ownership is less than 100%, the value of their personal equity will directly inform planning elements like liquidity potential at exit and how much funding a buy-sell arrangement requires.

 

Estimating value of equity owned

Value of Equity Owned = Current Valuation Estimate x Ownership Percentage

 

Frequently asked questions

How can financial advisors use value of equity owned insights to engage clients?

Show concentration of wealth in the business:

  • Many business owners only a vague idea of the value of their personal wealth tied up in their business.
  • Show them how they value of their equity stake compares to the rest of their portfolio to enable better decisions about risk, diversification, and long-term planning.

Estimate liquidity potential:

  • A client's ownership percentage is a key component in estimating their potential net proceeds in the event of an exit.
  • Show clients the value of the equity they own and model different exit and tax scenarios to see if their proceed potential is enough to reach their liquidity goals.  

Ensure the value of the owner's equity is protected:

  • Educate clients on potential risk to their equity in the event of death, disability, or dispute by ensuring they have an up-to-date buy-sell agreement and funding mechanism. 

Work with business partners:

  • Ask those clients that do not own 100% of their business for introductions to their business partners as they may also need financial advice.
  • Working across a set of business partners builds long-term trust, more coherent plans, and builds advisory context that is difficult to replace. 

💡 RISR estimates value of equity owned and the liquidity potential of the business both at the current valuation and at the goal valuation needed to reach their liquidity goals. RISR also makes it easy to track the status of a client's buy-sell arrangement to help ensure the value of their equity is protected from unforeseen events. 

What data is needed to estimate the value of equity owned for clients? 

 

Current valuation estimates

It's important to first estimate the value of all the equity in the business when identifying the value of the owner's equity

 

Ownership percentage

Ask the owner what percent of the business they own during onboarding and discovery to inform the value of their equity. 

 

💡 RISR streamlines business valuation and makes it easy for clients to share their ownership percentage through a digital fact finder.

Are business valuation and value of equity owned the same if my client owns 100% of the business?

 

Yes, but only when business valuation is calculated as Equity Value (not Enterprise Value).

  • "Business valuation" can be used as a broad term.
  • It's important to not whether the valuation in questions represents the value of shareholder equity only (Equity Value).
  • In such cases, the Equity Value is the same as the value of equity owned if the client owns 100% of shares.
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