What You Must Know About Business Valuation
What’s your business worth?
That’s a potentially important question for many reasons, not just selling. But most owners have only a vague idea of what their business would really be worth. And most of those who think they know are probably wrong.
Professional appraisers who regularly conduct business valuations say that owners err on both ends of the spectrum. Some fail to include intangible assets in their estimate and tend to undervalue what they’ve built over time. Others think their businesses are worth much more than the market would dictate. And of course, sentiment often interferes with good business judgment.
In many cases, owners don’t consider this a top priority. But there are many reasons why you should have at least an idea of what it’s worth (I list four of these below).
The value of a business is normally defined as its fair market value, or the price at which a property would change hands between a willing buyer and a willing seller who are both informed and under no compulsion to act. Minority valuations assess just a percentage of the value of the firm and apply discounts for the minority owner’s lack of control and possible lack of marketability of the business.
Independent business appraisers value companies and business interests of all sizes. And a valuation includes intangible business assets such as patents, trademarks, employment agreements, copyrights and goodwill.
Business owners often bring in an appraiser to prepare for a purchase, a merger or an employee stock ownership plan. Or a valuation might be needed for estate and gift tax returns, buy-sell agreements, litigation, tax challenges, divorce or many other purposes.
But even if there’s nothing on the immediate horizon, every business owner should have a current valuation in his or her desk drawer as a tool for helping make informed decisions about the company’s direction. An objective and independent valuation gives you a much clearer picture of where you’re going.
Here are four more reasons to perform a business valuation:
- To understand where your business fits in the industry landscape. A business valuation will describe precisely where you fit in your industry or specialized market, including the market price or value of similar businesses recently sold or publicly traded.
- To gain more insight into your “real world” financial condition. As a business owner, you probably have P&L and other financial reports to give you a picture of your financial health. But a valuation that includes intangible assets can expand on, confirm or deny existing beliefs.
- Make fast decisions on expansion, financing, sale or merger opportunities. When opportunities knock, you might not have time to conduct a business valuation. Having a current valuation in hand will let you pursue opportunities as they arise.
- Make smart choices to enhance the value of your business. A valuation will highlight the things that make a business valuable, and show you ways that you can increase what your business is worth.
Selecting a business valuation expert is not an easy affair. You’ll see an alphabet soup of business valuation credentials such as ASA, ABV, CVA and CBA.
The American Society of Appraisers (ASA) can provide a breakdown of different business valuation credentials to help you find the right professional. The ASA website (www.appraisers.org) is a great place to gather information on business valuations and to find an accredited business valuator. Their new “Business Valuation” section has a “Find a BV Appraiser” tool that lets you search by name, location and area of specialization.
These other resources can help:
- Lincoln Financial Group offers an online business valuation calculator. Visit www.lfg.com. Under “Planning Tools” look for Financial Calculators, and then “Other Calculations” to find Business Valuation.
- The National Association of Certified Valuation Analysts (NACVA) offers a free service online to help you find a credentialed business valuation expert. Just click the “Need Your Business Valued?” button on the homepage at www.nacva.com.
- The Business Valuation Toolkit, from MoneySoft, is a collection of software, data and productivity tools that will help you determine what your company is worth. Visit www.moneysoft.com.
- ValueHound (www.valhound.com) is a low-cost valuation service that business owners use for self-directed 401(k) and IRA annual valuation requirements. They offer a basic do-it-yourself 5-page version for $199 that’s delivered in 7 days.
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