Every business owner, CEO or president should have a current business valuation so that they know what their company is worth and where their company fits in the landscape of their market. A current and accurate valuation provides you the best information to make informed decisions about the direction and future of your business.
A business valuation includes an in-depth process that estimates the economic value of an owner’s interest in a business. When you place a monetary value on a company or business much more is involved than simply determining what a potential buyer might pay for it. There are many factors that need to be taken into account, such as, the type of company, market value, investment value, growth potential, tax laws, potential discounts and, of course, the individual circumstances of each business owner.
A business tax adviser has likely worked with the owners to optimize deductions and reduce taxable income; therefore, the financial statements do not always reflect the intrinsic value of the business. To determine a more accurate value, small-business owners should contract a qualified valuation expert to restate the financial statements. By recasting financials away from tax-based accounting, a potential investor or buyer should be able to see what the profits would have looked like if the business were run like a public company.
You may have a “number” in mind of what you believe your business is worth. Are you sure it is right? It might be too low. Small-business owners often have an unrealistic price in mind. Among the pitfalls, business owners assume a generic multiple for their industry times annual revenue equals the selling price. They may also compare themselves to a local competitor’s sale six months to a year ago. However, each business is unique, and growth and profitability can make a significant impact on business value.
The value of your business depends on the type of business being valued and the standards used. In many cases, the purpose for the valuation determines the appraisal methods used to determine the value of the business. The most common approaches to business valuations include:
Asset Approach – Often a calculation of the business’ assets minus the liabilities.
Market Approach – Relies on signs from the market place, comparing the selling price of similar businesses.
Income Approach – Attempts to calculate the future economic benefit of business ownership.
Business valuations are needed for various reasons, i.e., determining selling price, shareholder disputes, estate planning, gift taxation, divorce litigation, allocating purchase price among business assets, and buy/sell agreements.
Estate, Gift and Trust Planning
To determine estate taxes, a value must be placed on all assets, which include the business.
Buy/Sell Agreements
A buy/sell agreement is an understanding between shareholders of a closely held business that specifies the terms and prices of a buyout when one or more shareholders want to sell.
Mergers or Acquisitions
If the merger is through the exchange of stock, both companies must be valued to establish a fair exchange.
Divorce Settlements
Typically, a business must be valued during divorce proceedings. The business is usually given to one spouse while the other spouse receives assets of equal value.
Employee Stock Ownership Plans (ESOP)
An ESOP is a retirement plan in which company stock is donated instead of cash. The value of the stock must be determined, annually, to establish the employer’s deduction for the contribution.
Initial Public Offerings
When a company goes public, the corporation’s stock must be valued to set the initial offering price.
A business valuation takes into account all aspects of your business, from a review of the current management to a forecast of economic trends, to a look at intangibles, such as goodwill. Because of its in-depth analysis of all factors affecting your company’s performance, a business valuation is an excellent starting point for developing a strategic plan for your company’s future.
A valuation will point out areas of weakness and strength, as well as possible opportunities for future growth. It can also help you align your goals with those of other employee programs.
Many businesses use valuation on a regular basis to objectively measure their company’s performance. Henssler Financial offers the experience and specialized knowledge to provide you with a complete and reliable business valuation. If you want assistance in placing a value on your business, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
