Business Valuation 101: Why Do I Need to Know the Value of My Business?

You are not considering selling your business soon. Fortunately, you are not going through a divorce, and no one has died. So why would you need to pay to find out the value of your business? Some of the many reasons business owners choose to investigate the true value of their business extend far beyond the reasons listed above.

Exploring the financial worth of your company can help your company respond to other parties’ interests, it can help your leadership team make important decisions about the growth of the firm, and it can provide context for succession planning and establishing bonus and compensation structures for key employees and managers.

In some cases, the valuation results can be expressed in the form of a formal report. In others, support and calculations can be provided in abbreviated formats resulting in a less costly alternative.

The Usual

Reasons most professionals expect business valuations to be conducted typically revolve around communicating the value of the business to an outside party.

Transactions.

Owners often look to the valuation to confirm the value of the Company in a proposed sale or transfer. Often the report is intended to clarify their own opinion of value and sometimes to convince a buyer of the value. These objectives often include:

  • The identification of a normalized earnings stream.
  • The identification of synergistic characteristics.
  • Transferring ownership between shareholders or third parties.
  • Potential employee ownership and or succession planning needs.

Litigation.

  • In the case of divorce a valuation is often necessary in the division of marital assets.
  • In resolution of partner/shareholder disputes a valuation is often used to provide an understanding of value pursuant to state statutes and in arbitration.

Financing.

  • Equity firms may wish to provide alternative financing or acquire an equity stake in a business and often will rely on a valuation in confirmation of the business model.

Other common reasons for valuing a business include:

  • Reporting to the IRS or other tax agency.
  • Compliance for government agencies, banks and other organizations.
  • Providing information for the ESOP value (the annual per share value of an Employee Stock Ownership Plan).

The Unexpected

In evaluation of the need for a valuation, it is important to consider the valuation process and not just the resulting conclusion. Valuation is an art as opposed to a science. The conclusion is an estimate of value with merit only to the extent that one understands the process and assumptions upon which it was derived.

Understanding the process unlocks the ability to understand the business model in place and to adjust the characteristics in a way to provide the necessary insights to maximize opportunity and to limit potential risks in the application of a company’s resources.

A business valuation can present you with a perspective on your business that takes strategic planning to a new level:

  • The information provided in a business valuation can help you determine if that new product or service that the team is all pumped up about is more likely to fail or succeed.
  • Seeing the business through the perspective of the business valuation provides you with a new viewpoint on operating structure, giving you the opportunity to discover adjustments that will increase your revenues and reduce your costs.
  • Understanding the factors that drive the value of your business provides you with a unique angle into the products and services you should invest company resources in, giving you a chance to create a growth map for your company that cannot help but create profits.

To learn more about how a business valuation can help your business reach the next level, contact Cray Kaiser today. Stay tuned to our blog for the next post in our Business Valuation 101 series: Business Valuation Common Terms and Definitions.