Reasons You Might Require a Business Valuation

Determining a business’s worth isn’t simple, but it almost always paves the way for sounder financial planning. Whether you’re nearing retirement or negotiating a merger, a professional business valuation can set you up for success on your terms.

We’ve compiled some significant reasons why you might require a business valuation for your small business and how having one conducted can better position you in high-stakes financial situations.

Reasons You Might Require a Business Valuation

1. To Enhance Your Business’s Value

A business valuation isn’t a simple balance sheet cluttered with numbers and figures. Instead, it’s an evolving time-lapse of your business’s profile. Therefore, a valuation can act as a doctor’s visit, checking for areas of weakness and prescribing appropriate treatments.

Businesses can have a myriad of weaknesses stemming from various causes. For example, you might not be functioning at your operational potential because of lagging workplace productivity and high operating costs. These could cause the gradual decline of your company’s value without your knowledge. Through a business valuation, you can better understand your company’s weaknesses and make effective adjustments.

Getting a professional business valuation also helps you identify the areas propelling your business’s value. Value drivers are forces that have a significant impact on your business’s overall performance. Examples of value drivers are human capital, technology, social media marketing, website layout, design, and loyalty programs.

The valuation process can help you assess and monitor the state of your value drivers, paving the way for sounder internal investments and sustained future growth.

2. To Make Informed Decisions During Selling

The value of a business is a sum of both tangible and intangible assets. While a buyer may look into your equipment and inventory, the performance of your ongoing business will hold more weight. A valuation ensures your intangible assets ? business processes, workforce, suppliers ? are operating at full potential. This removes the guesswork and helps you establish an informed position in many stages of the selling process, from negotiations to closing.

Furthermore, valuation reports are highly detailed documents prepared by certified public accountants. They add an air of credibility to your sales proposal. This enhances buyer confidence, showing exactly how you arrived at a particular number and why it’s fair and reasonable.

As a general recommendation, you should have a business valuation conducted one year before a sale to give yourself ample time to prepare a concrete proposal.

3. For A Safe Retirement Plan

Aging business owners have a large chunk of their wealth tied up in their companies. However, most of them are neither privy to their business’s actual worth or overestimate its value.

While this may be well in the future for you, understanding the value of your business is important during many stages and can help you with future planning.

A company’s worth constantly fluctuates because of many factors, such as market sentiment and the company’s performance. The best course of action is to get a valuation conducted every year instead of having it when you’re nearing retirement. This is because you may not get enough time to enhance your business’s value or rethink your retirement options this late.

However, if you’re already past that stage, a business valuation can help set realistic expectations. Meaning, you can find out whether you have sufficient company assets to retire.

4. To Better Plan for Your Estate

Your business may represent a sizeable chunk of your estate to pass on to your future generations. A business valuation acts as a peacemaker, preventing posthumous family disputes and ensuring your wealth is fairly distributed.

A large estate may also invite the attention of the IRS. Well-supported documentation in the form of a valuation report can help you defend your position to taxing authorities. You may also get some discounts and exemptions since a valuation report also includes the details of your gift tax returns.

5. To Have Ease of Mind and Negotiating Edge in Mergers

Mergers are massive financial transactions, sometimes ranging in the billions. Some examples of high-rise mergers include Disney’s $7.4 billion acquisition of Pixar and Google’s $50 million acquisition of Android. One integral component that made these mergers so profitable and successful is a professional business valuation.

Although your small business won’t be involved in a merger this large, if you would like to take on another business partner or merge with another company, you need to have solid facts at your disposal in the form of a detailed valuation report.

Another thing you need to consider is the stressful nature of mergers. Mergers can become intense and high-stakes situations in the blink of an eye. Merger negotiations are like poker games, where a single bluff can make or break you. A business valuation gives you the peace of mind you need to keep your senses grounded and turn the tables in your favor.

Final Thoughts

Whatever the situation, it’s almost always a wise decision to hire a professional to estimate your company’s actual worth. Contrary to popular opinion, business valuations are not seasonal or situational business practices. Many business owners make valuations a habit to stay ahead of the game. As a small business owner, you should too.

This article was contributed by Paul Gardner.

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