Is It Time for Me to Get a Business Valuation?
The true value of your business can be difficult to quantify, and the process itself intimidating to begin. As a result, business owners find themselves with a burden of impending leg-work in revealing the value of their business. The first step to breaking down these barriers is to understand business valuation. In an effort to help you begin this process, we’ve identified some answers to basic questions that will bring clarity to business valuation and what it means for you.
What does a business valuation entail?
Business valuation involves having a specialist come in and analyze your current and historical financial statements, as well as review your forecasts and projections. Using this information, the specialist typically applies one or a combination of three valuation models: 1) the adjusted net asset approach (market value of the company’s assets); 2) the income approach (present value of the company’s expected future cash flows); and 3) the market approach (based on values of similar companies that have recently been sold). The specialist may also add premiums or discounts to the value such as: lack of marketability or liquidity discount, control premium, or contingency discounts.
What benefit does the valuation provide me with?
A formal business valuation provides you with a measure of what your company is worth in the open market. It empowers you with information that can impact decisions you make regarding your personal financial planning or the future of the business. If you issue stock options or other equity awards, it is used to properly account for those transactions. It can help to prevent disputes over transactions with new or departing owners. It also may help with the IRS and defending certain tax positions.
How often should I have my business valued?
Ideally, companies should obtain a business valuation every two or three years, or any time there is a significant event (such as a new or departing owner, anticipated sale of the business, issuance of an equity or stock award to employees, etc.). Having a regular valuation will allow you to see if your company’s worth is growing in the eyes of third parties.
While a business valuation does cost money, the information it provides can play a critical role in your decision making, minimizing owner disputes, strategic planning, and personal financial planning. Ultimately, it provides you with knowledge of the value of your company, and knowledge is power!