What Is a Business Valuation?
A business valuation is a process of setting the value of a business for several different purposes. A business might be valued before it is sold, or to determine the value before or after a disaster impacts it, or before going public.
Why Does Your Business Need a Valuation?
There are a lot of reasons your business needs a valuation. Several are listed below, and there be others that we’re not even aware of yet:
Things Happen
In business as in life, some events are unpredictable. Just as you should always have a resume ready for a job, and you should keep your business plan updated, you should prepare a business valuation and update it every year—just in case.
Unexpected Events That Impact the Business Owner
Something could happen to the business owner, like death or becoming disabled, forcing the sale of the business, or a change of ownership. Knowing the business value can help you sell it.
Opportunities
You might be able to take advantage of an opportunity, like an unexpected invitation to sell the business or to participate in a joint venture.
Change in Partnership
Your partnership might want to add a new partner or when a partner leaves, you will need the valuation to determine the buy-in or buy-out price.
Owner Exit
You may be thinking about leaving the business. Getting a business valuation is one of the first steps in creating your exit strategy.
Expansion
To expand your business with a loan or new equity, you may need a business valuation to present to a lender or investor.
Disaster
When a business disaster happens, you’ll need to value your business for insurance and federal disaster assistance purposes.
Life Events
Personal life changes like a divorce can also trigger the need for a business valuation.
You’ll Need a Business Appraiser To Value Your Business
An appraiser is an individual who estimates the value or worth of something. An appraiser sets a value on a property or other assets, including the assets of a business. A business appraiser is different from a residential property appraiser. They have different skills and look at different types of assets and situations. To find a certified business appraiser, see the Institute of Business Appraisers for a searchable list.
Business Valuations of Closely Held Corporations
Many small businesses are closely held corporations, in which a relatively limited number of stockholders have all the shares of stock. Oftentimes, the members of just one family hold all the shares, and there is little or no trading in the shares to establish their value. Getting a business valuation for a closely held corporation depends on coming up with a fair market value, but since there’s no trading of shares, there’s nothing to establish a market value. In these cases, the appraiser will need to look at financial data and other relevant factors, like stock values for similar businesses, and general economic conditions.
What’s Included in a Business Valuation Document?
Business valuation documents come in many varieties, depending on the type of valuation being done. Here are some key topics reported during a valuation:
Introduction
The first part of the document includes:
A description of the assignment The standards used (like fair market value) The scope of the report (what parts of the business are included) Information sources
Business Description and Industry Overview
This section includes a history of the business and its place among similar businesses.
Financial Statements
The report presents and discusses the business’s financial reports, including the balance sheet and income statement.
Valuation Methods
This key part of the report gives an overview of the methods used to analyze the business situation. It shows the values based on the types of methods used for the valuation. Most appraisers use asset-based, market-based, and income-based valuation methods.
Conclusion
The appraiser gives their conclusion and an explanation of the decision. They present an overall valuation and a justification for the value set on the business.
