Knowing what your business is worth for a business owner can be an essential piece of information for a business owner. While you might want to know how much your business is worth for sheer curiosity, a professional business valuation can help you make strategic decisions. Whether you are looking to buy, sell, or invest in a business or looking to protect your legacy, a business valuation can provide you with an accurate picture of your business’s worth.
When to Get a Business Valuation?
A business owner may need to or want a business valuation for several reasons. For example, are you looking to purchase or sell a business, acquire financing, or measure the value of your enterprise? If so, then you must obtain an accurate and professional business valuation. With this data, you will have greater insight into how much money to ask for when negotiating deals and access to more appealing investment opportunities.
Buying a Business
A professional valuation can help you determine the right price point for a business or provide information you can use in a negotiation with the seller. By working with a professional, independent appraiser, you can be sure that the purchase price fairly represents the business at the time of purchase. In addition, the appraiser will go through any relevant contracts and assumptions made in forecast statements to ensure that they are reasonable and support the price of the business.
Selling your Business
If you’re in a position to exit from your existing business, consider getting a professional appraisal to value your business. An independent business valuation can help you get a fair price for your business. The valuation provides an objective value for the company and can help explain the value of the business to potential buyers. Business valuations can also be a valuable tool for tax and estate planning. When you sell your business, you will also be liable for taxes. Understanding the value of your business before you sell it can help you structure the sale of your business. Your financial advisors could even be able to find ways to structure the transaction to minimize or defer your tax bills so you don’t have any surprises when you sell your business.
If you want to raise capital through debt or equity financing, having a business valuation is likely a requirement from potential investors or lenders. An independent appraisal will provide potential investors or lenders with a quantitative basis to support the value of your business. Potential lenders will want an independent valuation to support the financing you need for your potential. If you raise capital through investors, an independent valuation can help determine how much equity to give up in exchange for funding.
Setting up Employee Stock Option Program.
A popular way to retain key talent in a business may be to set up an employee stock option program. However, if you are operating a privately-held company, it can be challenging to understand how much your business is worth. Getting a valuation can help you set up an effective program that balances your equity in the company with enough incentive to retain employees.
Estate, Succession and Tax Planning
Business valuations are an essential tool in succession, estate and tax planning. For example, if you plan to give or sell your business, a valuation can help determine the company’s value at a point in time when establishing the estate or trust. In particular, for family-run companies, an independent business valuation can also help you structure a business for succession planning that works for you and your family’s needs.
You may even want to consider a business valuation for tax planning purposes. If you’re looking to sell your business now or in the future, you can work with your accountant or financial advisor to determine the best way to structure your business to avoid surprise tax bills on sale.
Changes in Family Situation
Significant changes in your family situation can affect your finances, and it might be necessary to understand your business’ worth. For example, if you’re going through a divorce or maybe dealing with the death of a spouse, you may require a business valuation to ensure that your finances are protected. With the help of a business valuator, you can provide that your business is sold at a fair price, accounting for any potential tax or settlement issues.
Checking up on Your Business
A business valuation can be a helpful exercise even if you are not considering any changes in the structure of your business. An independent valuation can provide an objective perspective on the health of your business. An independent appraiser can often pinpoint your business’s strengths or opportunities for growth that you might have missed. The takeaways from the valuation can help you strategically approach the next phase of your business’s growth.
How are Businesses Valued?
One of the steps in understanding the value of your business is figuring out the method used for the valuation. In general, there are three broad approaches to establishing the value for a business: asset-based, earnings-based and market-based. As a result, your business can have a wide valuation range depending on the method used.
If using this approach, the appraiser will look at the value of all the assets in your business minus the liabilities to come to a fair value of your business. Though this method may seem simple, it can be complicated or subjective if some assets or liabilities, such as intangible assets, are difficult to value.
Under this method, an appraiser will look at a business’s future cash flows and apply a multiple to ultimately establish a value for your business. Your business’s current income statements may be the starting point for this. Assumptions will then be for future revenue and expenses to come to an earnings number representing ongoing operations for your business. A multiple is then applied to the earnings to determine a value. The multiple used for the valuation is an integral part of the valuation and will be based on the industry and size of the business.
This approach is often the easiest to understand. Under this approach, your appraiser will compare your business to similar companies recently bought or sold. However, each business is unique, and there may not be a pool of transactions that can compare to your business. In this case, the valuator may choose to use a different approach.
Ready for a Business Valuation?
A business valuation can be an essential tool in your toolkit to help make strategic decisions for your business. However, developing an independent and accurate business valuation is a complex process. Therefore, working with a professional who understands your company and industry is vital.
Whether you are looking to buy or sell a business or are looking for estate planning valuation, the business advisory experts at Ford Keast LLP can help. Our business experts work with businesses of all sizes to advise on business valuation services and overall strategic transaction advice. To learn more about how Ford Keast LLP can provide you with the best financial expertise, contact us online or by telephone at 519-679-9330.