Why Business Owners Need a Business Valuation

Whether you own a start-up business or a seasoned enterprise, your business must be evaluated to determine its value today as represented by its future economic benefits. We’ll address the “why” shortly. The valuation of your business can quickly become complicated, and is even further compounded by the multitude of lenses through which the valuation can be measured.

There are several methods by which you can conduct a valuation. Should your business valuation be conducted using the income method, or the market or asset methods? Which one of these methods is the best choice for your circumstances? How do such influences as economic trends, industry factors, regulations, competition, and intangibles affect the value of your business?

This is why you will need the advice of a person professionally trained in business valuation, such as a Certified Valuation Analyst (CVA). A CVA, for example, must complete an extensive course of study, demonstrate that he or she has sufficient business experience, provide references and complete a five-hour examination.

While certainly not an easy task to complete, trained professionals who know how to work closely with you to identify the financial strength of your business will expertly guide the valuation process to the best conclusion for your purposes. We recommend that you work with a CVA that has years of experience working with different types of companies and who has performed valuations using each of the business valuations mentioned above.

What is your purpose?

What is the reason for your business valuation? We call this ‘defining the engagement’, and like most first steps, it sets up the path for the valuation work, so it is an important detail.

Among the more common reasons for conducting a business valuation:

- Selling or acquiring a business

- Establishing or updating a buy/sell agreement

- Bringing in a new partner or new investor

- Establishing an estate tax planning or gifting tax planning strategy

- Settling a divorce

- Liquidating a business

- Considering providing stock options

- Preparing for buying new or more insurance

- Buying out a partner

- Seeking business financing

- Establishing an Employee Stock Ownership Plan (ESOP)

- Considering making a sizable gift or supporting a charity

- Converting from a C corporation to an S corporation

There are others reasons for a business valuation, but the ones noted above are the major ones. Regardless of your reason for engaging a valuation firm, it is important to know what your business is worth in the market today and what it will be worth in the future. Armed with knowledge, you can forge ahead to build a successful financial future.

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