Business Valuation Basics
If you are a homeowner, you may have some idea of how much your home is worth. If you have a retirement account, you likely check the balance regularly. However, many small business owners do not know the value of their companies.
There are certain circumstances in which obtaining a business valuation is very important, for example, when preparing for a sale, planning for a future exit from the business, or obtaining investors.
A thorough, professional appraisal is important to ensure the valuation’s accuracy. The method an appraiser uses can be tailored to address your specific business and the reasons why you are seeking a valuation.
The Value of Valuing Your Business
Many business owners view third-party valuations as overly complicated, expensive, intrusive, and time-consuming. However, knowing the value of your business is necessary when you are preparing for a sale. In addition, there are a number of other common reasons for obtaining an independent business valuation:
Exit planning
Obtaining financing from a lender
Raising capital from investors
Insuring the business
Implementing an owner buyout agreement
Tax, estate, and succession planning
Getting divorced and dividing assets
Uncovering areas for growth and expansion
For some businesses, obtaining detailed business valuations at regular intervals can avoid the expenditure of resources in the wrong places and help identify investments with higher growth potential.
Business Valuation Methods
There are several ways to calculate business value. The three most common approaches to business valuation are asset, income, and market-based approaches.
Asset-based business valuation. Determining a business’s value using the assets it owns focuses on its book value, which is derived from the balance sheet. Using this approach, business assets—tangible and intangible—are valued and totaled, while liabilities are deducted. Determining the value of intangible assets can be tricky, so obtaining a professional appraisal is important.
Income-based business valuation. Another common method for valuing a business uses its cash flow figures to project future income generation. Newer businesses and established businesses may use slightly different income-based approaches.
Market-based business valuation. A market approach to business valuation looks at the purchases and sales of similar local companies. However, one downside of this method is that it could result in a business being undervalued relative to its assets and earnings.
A professional appraiser may determine that a combination of these three methods will provide a fairer and more accurate business valuation.
Involve a Business Lawyer in Important Transactions
There are many online business valuation calculators that provide instant estimates of how much a company is worth. However, these simplified formulations are not a substitute for a professional, credentialed appraiser who can apply the most appropriate methodologies for your industry and circumstances.
Along with a credentialed business appraiser, a lawyer should be part of your team when you are preparing for important transactions such as a sale of the business. Learn the value of an experienced business attorney: contact us today to schedule a meeting.