5 Reasons You Need a Business Valuation
Business owners are sometimes so focused on the day-to-day operations of their businesses that they overlook a large component of their overall wealth—the value of their business. There are several occasions when an owner should consider having a formal valuation performed for their business. Through a formal business valuation process, you will learn what the fair market value of your business is, or what a hypothetical buyer would be willing to pay for your business. You should have a business valuation handy at all times for a variety of important business and personal financial planning reasons such as planning for a sale of the business, retirement, estate planning or business strategy. And when you have a valuation performed, you want one that is accurate and will hold up in case of litigation.
Selling Your Business
As the economy continues to recover and M&A deal flow improves, many business owners are looking to cash out. In order to be well informed during price negotiations, it is important to have an accurate idea of what your business is worth and how a buyer may be viewing the cash flows of the company. Performing a business valuation early in the planning process (potentially years before a sale), can help you achieve a more favorable outcome as you will have a better understanding of the value drivers of your business. By planning early, you can actively improve these value drivers to maximize the realized value during the exit.
If, like many business owners, the sale of your business is your retirement plan, you need to know the value of one of your biggest assets to better plan for retirement. Your perception of your business’ value may be very different from what the pool of potential buyers is willing to pay. Understanding the fair market value of your business will allow you to have more confidence in your planning process and help you achieve your retirement goals.
Planning Your Estate
Your business may be a critical part of the estate you plan to pass on to future generations or other family members. If the estate is sizable enough, an estate planning transaction may draw some attention from the IRS. Filing a well-supported and documented valuation with your gift tax returns will help defend the value of the business to taxing authorities, especially if certain valuation discounts are applied.
Managing Your Business
Similar to the way you might follow the stock price for a public company, tracking the per share equity value of your privately held business can be an effective way to measure performance or set management incentives. A valuation professional will be able to set up a framework to help identify changes in the business that could improve value. This information and the perspective of an independent third-party appraiser can help you decide how to allocate resources and invest to drive growth.
Defending Your Value
It is particularly important to have a well-supported valuation when there is a possibility that the value of the business may be contested as part of a shareholder dispute, purchase or sale process, or a divorce.
You might be tempted to minimize costs during these already expensive processes but a more robust analysis can differ significantly from a high level estimate generated from the use of valuation shortcuts. A thorough analysis will be more reliable, supportable and defendable when disputed.