News Reasons for Obtaining a Business Valuation

Reasons for Obtaining a Business Valuation

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Many business buyers, business owners, business sellers and others need business valuations for a wide range of purposes. Those purposes range from considering the purchase or sale of a business to complying with a court order to settle a legal issue. Oftentimes, business owners just want to have an idea of the current value of their business.

Here are some of the reasons people come to us or use EZValuation, our business valuation software tool, for business valuations:

Curiosity
Just as people like to check their stock portfolio from time to time, business owners like to get an idea of their company’s value and changes in its value. A basic valuation can be obtained for free usintg the EZValuation program which can give you a good idea of your business’s value, based upon your answers to several financial and non financial questions.

Buying a Business, Initial Evaluation
Often, business buyers are bewildered as to how a seller arrives at an asking price for his or her business. Sometimes, the asking price is not based on any rhyme or reason. Before getting too involved in negotiating a business acquisition, it is a good idea to determine if the asking price is in the ballpark. A difference of 10% to 25% (asking price vs. independent valuation) is usually bridgeable. However, if the difference is much more than 35% or so, chances of buyer and seller getting to an agreement are pretty slim.

Buying a Business, Offer & Negotiation Phase
Once it’s determined that buyer and seller are in the same ballpark, a more formal valuation will be very helpful. It’s one thing to ask a seller to lower his price by 20%; It’s quite another to show that seller an independent valuation that details the reasons for your offer price.

Selling a Business, Early Preparation
The decision to sell a business rarely happens overnight, and neither should the planning. The time to start planning for the sale of a business is 1 to 2 years prior to the ideal target date of the sale. A key element of the planning is an objective opinion your company’s value. This is important not only for setting reasonable expectations and a reasonable asking price. It’s also important because there are some clear step you can take to enhance the value of your company, and to make the sale easier and quicker, if you start the planning in advance.

Selling a Business Within One Year
If you’re planning to offer your business for sale within a year, it’s definitely time to get a valuation along with a little professional guidance. Setting the wrong asking price, or even the right asking price without documentation to support it, can be deadly. Also, there is a lot you can and should do to make the business more salable (and more valuable), if you don’t wait until its too late.

Taking on a New Partner or Buying Out a Current Partner
Note that in this context we are using partner to mean any person or entity that has ownership of a business. It can be a stockholder in a corporation, a member of an LLC, or a partner in the legal sense; a partner in a partnership entity.

More often then not there is a difference of opinion as to the value of one’s partnership interest (or stock or membership share) in a closely held company. A third party valuation is the best way to mitigate disagreements and arrive at a fair buyout (or buy-in) deal.

ERSOP, ESOP, ROBS
When a business is in one of these tax advantaged accounts the Internal Revenue Service requires that a valuation be done annually, even if there is only one employee.

Loan Proposal
Banks and other lenders use a number of different criteria in making lending decisions. The overall value of the business, can be an important factor. A good independent business valuation can make the difference between a loan rejection and an approval. In the current tight lending environment, a business borrower needs every advantage he can muster to get that approval.

Loan Proposal, SBA
The Small Business Administration (SBA) has specific rules for business valuations that it will accept (as detailed in SBA SOP 50-10 5b). If you are applying for a SBA direct or SBA guaranteed loan to acquire a business, it is important that any submitted valuation adhere to SBA rules.

Raising Venture Capital or Independent Investment
Professional venture capitalists as well as independent investors are first and foremost looking for a return on their investment. While investors understand that they are taking a risk, a well documented independent valuation can go a long way toward mitigating the perceived risk, and toward getting you the right deal for the investment you need.

Estate Planning
One’s business is part of one’s estate, and often it’s a very a large part. In fact, for many business owners, it is the largest single element in their estate. However, business owners in this circumstance often don’t know the value of their largest holding. For a myriad of reasons ranging from tax planning to assuring your wishes are accurately carried out without undue difficulty or conflict, a business valuation is essential for proper estate planning.

Estate Settlement
When a going business is an asset of an estate, a valuation is essential and often required by a court, taxing authority, or both. Unfortunately, disagreements are common in lots of aspects of estate settlement, and the value of a business that ‘s part of the estate is no exception. It is not uncommon for contesting parties to each retain valuation experts who ascribe significantly different values to the same business. It is best to hire a valuation expert who has extensive experience with valuations for estate purposes and in defending his or her valuation in court testimony.

Divorce and other Legal Purposes
Business valuations are very often needed for divorce settlements and other settlements where a court or arbitrator is called upon to make decisions regarding fairness. In these situations, it is not uncommon that contesting parties will each retain valuation experts who ascribe significantly different values to the same business. In a situation that may end up in front of a judge or arbitrator, it is best to hire a valuation expert who has experience in courtroom testimony.

Enhance the Value of a Business
There are relatively easy steps that can enhance the value and salability of many, if not most businesses. This involves analyzing the business’ strengths and weakness from a buy-sell perspective and capitalizing on the strengths, while correcting the weaknesses. Some steps for example are as easy as putting verbal agreements into writing or securing a lease renewal option. Other steps take a bit more effort but can be well worth that effort. The place to start is with an initial valuation that identifies a company’s strengths and weaknesses and the estimated cost, effort, and benefit to mitigate those weaknesses. We would be happy to discuss the possibilities of enhancing your company’s value and salability, prior to putting it on the market.

Reasons for Obtaining a Business Valuation
General Contributor
Janice is a writer from Chicago, IL. She created the "simple living as told by me" newsletter with more than 12,000 subscribers about Living Better and is a founder of Seekyt.

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