Our weekly tax blog has tax tips and tax ideas for small owners business and individuals.Learn more
Business valuations: When and how to get one
There comes a time in every business owner’s career when the need for a business valuation is necessary. It could be because you want to sell your business, you’re applying for a loan or line of credit, or you need values for tax-planning purposes. In fact, regularly valuing your business helps you track your progress over time. Whatever the reason may be, read on to learn when to get one and—most important—how to get one.
Business valuation basics
In simple terms, a business valuation is the process that accurately determines the present value of your business. Analysts use many factors in determining this value: the current market value of your assets, future earnings and even company leadership.
When establishing value, a business valuation professional uses industry standards and can apply three methods of valuation:
1. Asset approach
The asset approach uses a mathematical calculation that starts with the current fair market value of your business’s assets and subtracts the fair market value of liabilities.
2. Income approach
When the income approach method is used, a business’s value is determined based on its potential future cash flow. It relies on using many assumptions about your existing business and future cash flow potential.
3. Market approach
The market approach determines your company’s value based on the sales of similar companies. This approach can be challenging due to the wide breadth of variables within any market. Not only is valuation important when thinking about selling your business, but when done consistently, it paints a picture of how your business is progressing, both positively and negatively. It provides insight into your business’s risks and financial performance compared to similar companies, sees what aspects are creating value, and allows you to enhance overall business performance.
When to get a business valuation
There are several scenarios in which your business will either require or benefit from obtaining a business valuation. While this list isn’t all-encompassing, these are the most common reasons:
If you find yourself going through a lawsuit due to domestic relations (i.e., divorce) or disputes over taxes and estate planning, you need to know the value of your business so assets are properly split.
Exit strategy planning
Knowing the value of your business now—and the areas where you can improve—will set you up for a financially successful exit in the future.
Selling or merging
There may come a time when it makes financial sense to sell your company or merge with another, and a valuation ensures that you’re not devaluing your business by underselling or hitting the market too high.
Buying out or adding owners
When a business owner leaves or a new one comes on board, a business valuation establishes transparency when determining fair and equal buyout or purchase amounts.
Applying for a loan or line of credit
If you’re looking to grow your business, expand your facilities, open a new location or even launch a new product, lenders need to know the current value of your business to make an objective decision on supplying funds.
Better business insights
While you may not have a pressing reason for a valuation, proactively obtaining one on a consistent basis (i.e., annually), helps you make better and more informed decisions as a business owner.
In any scenario, it’s best to work with an accredited professional.
How to get a business valuation
There are several ways to get a business valuation: online calculators, looking for comparable sales, adding your assets and subtracting your liabilities, or bringing in a professional (and accredited!) appraiser.
Our advice is to always go with an accredited professional, and here’s why:
They’re objective and realistic.
They’re experienced and have a specialized skill set.
They know which valuation methods apply best to your business.
They know the dynamics of the market.
They’re knowledgeable about their appraisal if needed to defend their valuation in litigation.
When hiring a professional appraiser, look for one who’s part of the American Society of Appraisers or a business valuation expert, such as a bank, lender or accountant. The valuation process can be complex, and you’ll want a professional to help guide you.
Once you’ve determined how you’re going to value your business, here are a few steps you can take to prepare for the valuation.
1. Gather all financial documents
This includes your business tax returns (the previous three to five years) and financial statements, like your balance sheet, income statement and cash flow statements.
2. Collect essential documents
Depending on your valuation reason, include copies of your business licenses, deeds, permits, and any contracts with insurers, vendors, creditors or clients.
3. Compile list of intangible assets
Confirm that your balance sheet includes all intangible assets, like cash, property, equipment, copyrights or patents. Other items, such as actively engaged social media profiles, positive online reviews and extensive email lists can help improve your business valuation.
Being prepared for your valuation can help ensure a quick and thorough process to help determine the worth of your small business.
It’s time for a business valuation
Whether you need a business valuation or just want one to gather deeper insights into your business, knowing the value of your business at all times will prevent surprises later down the road. Make a plan now to get ahead of the game and determine the value of your business, even if it’s just to create a baseline.Back to issue