What’s the Market Value of Your Business?
A Business Valuation Provides a Key Benchmark for Improvement
By Ryan Scheck
Business owners often think of business valuation as a necessity only when reacting to an event like retirement, a business dispute, or divorce. But the best time to do a business valuation is long before a triggering event occurs. Business valuation should be the first step in succession planning and should be done years in advance of being needed.
What is a Business Valuation?
A business valuation is a professional analysis of a business to determine its fair market value.
At its most important level, a business valuation is a tool for building value and providing owners with greater flexibility. A good business valuation identifies a business’s key value factors and anticipates the effect management decisions will have on value. The process is combination of art and science and is often completed by a CPA with the Accredited in Business Valuation (ABV) credential.
The CPA weighs a wide variety of factors in reaching a valuation, including:
- The type of business
- The local and national economy in which it operates
- The business’ financial performance
- All business assets and liabilities
- Any proprietary knowledge or technology
Why Do You Need a Business Valuation?
Numerous circumstances can drive the need for a business valuation. Business owners most often seek business valuations for the following broad reasons:
- Change in ownership – A valuation plays a key role in the negotiation of the sale, purchase, or merger of a business. Valuations also are helpful when shareholders or partners are added to the management group, or when they want to be bought out. Additionally, a business valuation is used in the establishment and/or annual update of an employee stock ownership plan (ESOP).
- Tax and succession planning – Business valuations are instrumental in determining gift or estate tax liability. This is needed in the course of both retirement and succession planning.
- Legal disputes – Many legal disputes require a business valuation, especially if assets need to be divided among multiple parties. The most common legal situations involving business valuations include divorce, partner disputes and damages settlements.
- Securing credit – For a business to raise investment capital or access additional capital to finance an expansion, creditors often require a business valuation.
Business valuations provide an important function in the context of succession or exit planning, as well. If you are looking at a five- to 10-year horizon for exiting or succeeding your business, obtaining a business valuation now at the beginning of the process will give you a benchmark by which to measure the value of the managerial and operational improvements you make over the next few years. A business valuation now can help reveal areas of your business that need attention, which can help you fetch a higher selling price if they are improved before you exit.
How is a Business Valuation Conducted?
The specifics of a business valuation can vary greatly, depending on the type of business and the assets it holds. However, three primary methods for calculating valuation are employed by most valuation professionals.
The methods below are commonly used by CPAs accredited in business valuations:
- The asset-based method – At the surface, this strategy is relatively straightforward: the business value equals the total value of business assets minus the total value of its liabilities. Asset valuation can be calculated using either ongoing concern or liquidation value. The asset-based method generally results in a lower value than the other two valuation methods. It is often used to establish a floor, or minimum, business valuation.
- The income-based method – This approach uses both historic and current income data to create a projection for the future stream of cash flow. This method is particularly useful for companies such as startups that have not amassed significant assets but expect rapid growth.
- The market method – This strategy establishes value by comparing the business being valued to the value of other similar businesses that were recently sold. The value can be adjusted to make up for disparities between the different businesses. This method works well if there are good comparables available.
How Do You Pick a Business Valuation Analyst?
When looking for a business valuation analyst, look for a firm that employs professionals who are accredited in business valuation, and that has a good reputation. Your business banker or attorney may be able to provide recommendations. There are a variety of accreditations to look for, including:
- Accredited in Business Valuation (ABV) by the AICPA
- Certified in Business Appraiser (CBA) by the Institute of Business Appraisers
- Certified Valuation Analyst (CVA) by the National Association of Certified Valuation Analysts
These are specialized accreditations that assure you that a valuation professional has received extensive valuation training and continuing education in order to learn how to perform thorough and accurate business valuations.
Choose ABBB For Your Business Valuation
The insights revealed by this type of comprehensive review of your business will help inform the key business decisions that you make daily. ABBB is invested in helping your business continue succeeding. If you’re looking for a CPA partner that will guide you in developing actionable strategies for pursuing greater profitability and business growth, contact our business valuation team.