Many business owners know their long-term goals and growth plans and recognize why these elements are crucial to success. However, far fewer know how a valuation can help them achieve those goals. A business valuation is used to estimate the economic value of a business, or a stake in the interest, at a certain point in time.
A professionally conducted business valuation may benefit the owner(s) in multiple types of business transactions. Some examples of when a business valuation may be necessary include:
- Selling a Business: One of the most frequent times a valuation is conducted is during the sale of the business. It is generally in the interest of the owner to obtain a valuation or to at least consult with an expert. In some instances, the owner may use the data from a valuation to negotiate a higher selling price.
- Securing a Loan/Raising Capital: When owners are trying to secure a loan or raise capital, a valuation may ease any concerns that the borrower or investor may have. Some loans, such as the Small Business Association (SBA) loans, often require an independent valuation from a qualified source. A valuation can also help your company attract more interest from investors since it provides clarity on how their contributions will be utilized and what type of return on investment can be expected.
- Partnership/Ownership Transactions: When two or more owners enter into legally binding agreements to buy or sell part of the company, a valuation can often help the parties negotiate a fair deal and possibly prevent or resolve disputes. This is also true in cases where shareholders are bought out of the company.
- Mergers & Acquisitions: Similar to when you sell a business, if your company merges with another or is acquired by a larger entity, you are in a better position to negotiate when you understand the actual value of your company. Large companies often try to arrange the best deal possible, but with data from a professional valuation, you may be able to justify your request for a higher selling price.
- Legal Disputes: Many types of legal disputes can arise involving your business. Anything from a divorce or family dispute to corporate litigation between shareholders can impact your business. Valuations are often necessary to value the assets for legal filings when there is a death, disability, or disaster.
- Tax Purposes: Valuations may be used to resolve tax issues. They might be necessary after a death to determine any estate taxes or for gift tax liabilities related to the company’s transfer of ownership of gifts (to family members or for donations.) There may also be a requirement for a business valuation when gifting or donating company stock.
- Insurance: Understanding your assets’ value can often help you obtain the proper level of insurance coverage.
Despite being a straightforward concept, the assessment of a business’s value requires a high degree of skill. The process is based on science and mathematical figures, but it is also an art. Business valuation is based on information, judgment, and experience. It requires the valuator to conduct an in-depth review of financial statements for the business. The statements are then compared to industry norms and any other qualitative or quantitative information that may be pertinent.
Some business owners may be reluctant to move forward with a valuation if they feel that it may expose weak financial or accounting controls. The valuation process provides the opportunity to address internal deficiencies, which can ultimately help you identify essential actions to increase the long-term value of your business.
Whenever a valuation is necessary or desired, working with a professional is the best way to ensure you receive an accurate and fair valuation. To be considered an expert in the field, a financial specialist that conducts valuations will need to be credentialed. Major national organizations that offer valuation credentials include the American Institute of Certified Public Accountants (AICPA), the American Society of Appraisers (ASA), the National Association of Certified Valuators and Analysts (NACVA), the Institute of Business Appraisers (IBA), and the International Society of Business Appraisers (ISBA).
When the need for a valuation arises, you must ask the right questions to know that you are working with professionals with the right expertise that ensures high-quality work. Contact Shuster & Company, PC today to learn more about our history and experience with business valuations and find out how we can help you properly value your business.
A full-service Certified Public Accounting Firm located in Denver, Shuster & Company, PC provides quality, personalized financial advice and guidance to individuals, businesses, and the legal community. We offer an extensive range of services, with emphasis in forensic accounting, business valuation, and litigation support.