Business Valuation: What’s Involved & How It Helps Your Business?
“What’s my business worth?”
It’s a question many business owners find themselves asking for various reasons. If you want to know the estimated value of your company, a business valuation can be helpful.
At Boeckermann Grafstrom & Mayer, we realize business valuations are both an art and a science. After all, there are many factors involved. Hopefully, we can help you make sense of this often complex process.
The Basics of a Business Valuation
A business valuation can be defined as the process of determining the estimated worth of your business at a given point in time. A financial advisor will use various types of information to help determine this value, including assets, liabilities, projected earnings, industry-specific information, and more.
The Benefits of a Business Valuation
Business valuations offer many benefits, depending on your goals. For example, a business valuation may result in:
- Achieving tax and/or financial reporting requirements: This is perhaps the most common benefit experienced by business owners. Business valuations assist businesses in achieving compliance with specific reporting requirements.
- Simplified negotiations during a sale: Understanding the estimated value of your business gives you a solid starting point when it comes to setting an initial selling price and negotiating with potential buyers. As a result, you can receive what your business is truly worth.
- The identification of weaknesses: Business valuations have a unique way of uncovering growth opportunities. By understanding these areas of weakness and taking action, you can enhance and protect the value of your business.
Who Needs a Business Valuation?
Business valuations are beneficial for many other situations beyond the sale of a business. In fact, many business owners choose to have their businesses valued to prepare for:
- A sale of partial interest
- Valuing of equity compensation
- Ownership disputes
- Buy-sell agreements
- Estate planning
- Business structure changes
- Succession planning
- Estate and gift taxes
- GAAP and IFRS financial reporting
What’s Involved in a Business Valuation?
For the best results, business valuations should be completed by experienced business valuation professionals who are well-versed in valuation methodologies. This professional will start your valuation by understanding your unique goals and the motivation behind the valuation. These goals will directly impact the valuation approach used.
You’ll then be required to deliver specific information to your business valuation professional, including (but not limited to) historical financial statements, prospective financial statements, in-depth information about your industry, and more. This information will be the foundation upon which your valuation is based.
An Art and a Science
As we mentioned earlier, business valuations are both an art and a science. There are many factors that go into developing the value of a business. We place these factors into two categories: tangible and intangible.
Tangible factors are simple to value. They’re also typically where any business value begins. These factors include all of your assets and liabilities as well as your operating results.
Intangible factors can’t necessarily be explained in monetary terms. This is where the “art” of the valuation comes into play. These factors can include but are not limited to:
- Strengths and weaknesses of your business
- Management structure
- Competitive advantage or disadvantage
- Economic environment
The 3 Standard Approaches to Business Valuations
With a clear understanding of your goals and factors affecting your business, the next step is to select a valuation approach. There are three business valuation approaches used most often for privately held companies, including the cost (asset) approach, the income approach, and the market approach.
1. The Cost (Asset) Approach
You would never sell a business for less than you could liquidate it. This is the basis of the cost approach, or asset-based approach, which results in the value of your assets minus your liabilities.
For this method, value is typically determined based on your current financial statements or your adjusted net assets.
2. The Income Approach
The income approach requires a higher level of subjectivity than the cost approach. Put simply, the income approach aims to identify the value of future cash flows or the present value of what your business will make in the future.
3. The Market Approach
In the market approach, the value of your business is based on the sales of other businesses comparable to your own. For example, your business valuation professional could research businesses sold in the same town in the same year that were similar to your business to discover useful information.
Unfortunately, not all businesses will have comparable businesses that fit close enough to be informative. All businesses are unique. At Boeckermann Grafstrom & Mayer, all of our conclusions are tested for economic reality and comply with the standards set by the AICPA and NACVA.
Need a Business Valuation? Reach Out to Us Today.
Our experienced certified business valuation professionals will help you clarify the complex valuation of your company so you can reach your goals. To learn more about our business valuation services or to speak to one of our team members, send us a message.