Do you know when to seek out a business valuation pro?
When it comes to knowing the true value of their business, the majority of owners often think their company is worth much more than it actually is. This can be problematic for the owner who is trying to sell their company or retire on time. That being said, it’s actually not that uncommon for a business owner to take this approach and to move forward with the selling of their company or to plan for their own retirement simply by relying on valuation multiples they’ve heard of … without consulting a professional. Unfortunately, this approach very, very rarely has a happy ending.
Another common misconception is to say that your company is worth four times EBITDA (earnings before interest, taxes, depreciation and amortization), but that doesn’t take into consideration business risks, cash flow expectation, balance sheet strength or weakness and the true earnings of the business. Instead, it’s imperative to have a professional, objective valuation from a firm that will stand behind its opinion.
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Business Valuation Defined
Business valuators work closely with business owners, attorneys, and advisers to deliver a fresh unbiased view. Valuations are a complex process and demand specialists who have the knowledge and expertise to perform a thorough valuation that will hold up to the IRS or in litigation. The process values all closely-held stock, tangible assets and intangible property that may be transferred to a trust/family limited partnership or other forms of business entities. Sometimes, valuations are required due to a triggered event such as:
- The death of a shareholder
- Gifts of closely-held stock
- Dispute related valuations, such as a shareholder dispute or divorce
- Forming employee stock ownership plans
- Converting from a C corp to an S corp
- A charitable contribution
Other valuations aren’t driven by a specific event, but are used by owners to make important decisions about their future. These valuations can also be used for succession planning or selecting an exit strategy, determining life insurance needs, ways to increase value, setting or updating the value in a buy-sell agreement and/or developing incentive plans for management.
While it’s always important for an owner to know the true value of their business, sometimes planning ahead has even greater benefits. For example, for succession planning valuations, business owners should begin their business succession plan at least five years before planning to implement it. In doing so, they have the baseline knowledge needed to determine an ideal growth strategy designed to provide them with the funds needed for their next personal or professional journey.
For an accurate value, work with an experienced, credentialed professional who will take all of the factors and variables into account. Once you’ve chosen the professional with whom you will work, you can proceed with the actual valuation of your business, which will require you to:
- Assemble all required information, such as your income statements and balance sheets.
- Any adjustments to those statements will be adjusted to reflect what income and expenses are recognized, which is referred to as recasting your income statement or balance sheet.
- Select a business valuation method.
- This can be one or more of these approaches: asset approach, market approach or income approach. One reason for the utilizing several business valuation methods is to cross check the assumptions and calculations.
- Calculate the true value of your business based on your chosen business valuation method.
As a rule, having a business valuation performed every other year is a good practice considering that your business interest is likely your most valuable asset. Email Rea & Associates to speak with a business valuation professional about the true value of your business or to learn more about the business valuation process.
By Jack Miklos (Dublin office)
Looking for more insight into business valuations and why you should know the true value of your business? Check out these articles:
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