Valuations can come in many types and range from real estate appraisals, business valuations, asset valuations, collectible valuations, intellectual property and intangible asset valuations, royalty valuations, etc. In general the main objective of a valuation is to ascertain the exit value of an asset. In other words, what would a third party pay for such an asset?
Most people understand the basic process and concepts behind selling a house. Typically, homeowners house hire a realtor that understands the market in which they live and can estimate the approximate price a willing buyer will pay the homeowner. In order to value a home, a realtor will typically look at comparable houses in the same area that have recently. This analysis gives the realtor and homeowner an indication of the resale value of the house. However, every house is different. One house may have a backyard kitchen and a pool and another house may not. No two houses are exactly alike nor will they sell for the same price. The same is true of businesses.
While most people understand real estate transactions, you may not know the benefits of a business valuation. In this article, we will explain five reasons you may need a business valuation.
- Selling a Business – Many business owners have an idea or estimate of the value of their company but they have never gone through the business valuation process. In our experience, most business owners tend to over or undervalue their business. The valuation process requires a highly educated, licensed, valuation expert with experience valuing specific types of businesses and industries. Accurately valuing the business also requires a set of accurate financial statements along with forward looking income and cash flow projections. It’s not as easy as just taking a multiple of revenue or EBITDA although that may be a good starting point.
Selling a business is no small task! If you are selling your business, our advice is to get a valuation at the beginning of the sales process to give you a better indication of what a buyer may be willing to pay.
As with the real estate example above, it is wise to understand the potential value of your business before listing it on the open market.
- Succession and Estate Planning – The part of our jobs that we enjoy the most is listening to the stories business owners tell about the evolution of their businesses. Many of those stories entail passing the family business down to multiple generations. Grandpa founded the business, Mom and Dad grew the business, the kids now run the business. When individuals own a business and have intentions of passing the business down to family members or selling the business to benefit their heirs, a business valuation is a must. Succession and estate planning may also require asset appraisals depending on what the estate owns. We could write an article just on this topic alone as there are many challenges including taxation, legal matters, and entity structures to be considered.
The point is for you to have an idea of what your business may be worth so that you can correctly plan the most tax efficient way to keep it in the family. Start now!!!! Do not wait. Proper planning is crucial to succession planning. Typically, succession planning is a 5-year process, at a minimum, to transition properly.
- Buying Out a Partner – Ever thought about buying out a partner? Perhaps a partner is retiring or an owner is ready to quit and pursue other passions. Many partnerships have a buy/sell agreement in place should a buyout occur. As part of the buy/sell, a business owner must know the value of the exiting partner’s interest. A business valuation will assist the remaining owners in determining a proper valuation so that the exiting partner is fairly compensated. A business valuation will also equip the owners with information for structuring the buyout. You would not build a house without knowing the cost up front. A business owner should know the value of his or her business before contemplating a partner buyout.
- Divorce – Yes. We wrote it……the ugly “D” word. Divorce can relate to a partnership or corporate separation or a civil divorce between two people. In both instances, business valuations are necessary. In a corporate divorce, to make both parties as whole as possible, a business valuation provides a much more equitable transition and exit between the divorcing entities.
A business valuation will also provide rational support in a difficult emotional situation. In a civil divorce, both parties have certain assets and some of those assets may be in the form business interests. In the State of Texas, certain property earned or purchased during the marriage can be considered community property. During a divorce, a business valuation may be required to properly divide the assets. A business valuation provides both parties and the mediator a starting point for a smooth settlement.
- Corporate/Operational Planning – Finally, a business owner may just want to crunch the numbers to get a better indication of how much his or her business is worth. For example, my business today may be worth $5 million but I may not be ready to retire for 10 more years and I may have aspirations to grow my business to $10 million. Having a business valuation today will provide knowledge and information that a business owner can use as motivation to take the company to the next level. A business valuation expert can also provide business owners different valuation models that can be used to evaluate different financial forecast scenarios for planning purposes. Various forecasts and scenarios are exciting to look at and provide business owners with the insight needed to grow and increase value.
If you would like us to discuss business valuation opportunities with you and your company, please give us a call. We would love to meet you! Thank you for your time and may the value of your business increase in 2019!!