An estimate of value and a full business valuation represent two different tiers of understanding the worth of a business. An estimate of value offers a broad, general approximation of what your business might be worth in the current market. This is typically derived using a limited amount of financial data, some comparable business sales, and industry rule-of-thumb figures. It offers a quick, though less precise, understanding of your business’s value.
A full business valuation, on the other hand, is a comprehensive, in-depth analysis of a company’s worth. It involves a rigorous examination of a multitude of factors including, but not limited to, a business’s financial history, market position, assets, debts, revenue streams, competitive landscape, future earnings potential, and more. The result is a more precise and well-substantiated valuation figure, providing a much deeper understanding of your business’s value.
Business owners should consider having a business valuation or an estimate of value performed for several reasons. A valuation provides essential information when contemplating selling the business, planning an exit strategy, or making major decisions such as expansion or restructuring. Moreover, understanding the business’s value can aid in securing financing or attracting investors, as it allows an objective demonstration of the business’s worth. Furthermore, a valuation can be crucial in personal financial planning, particularly in instances such as estate planning or a divorce settlement, where a clear, objective value for the business is needed. Therefore, whether an estimate of value or a full business valuation, understanding the worth of your business is a key component in informed decision-making.
While there are many reasons to ascertain the value of your business, below is a sample list of 50:
- To know what business is “worth”
- To have an idea how the market would value the business should you want to sell
- To set up a process that would make the company more marketable should the owner decide to sell or when they are ready to sell
- To be used to consider an offer from someone who wants to buy the business
- Creates a bigger playing field for owner to assess the results of their decisions or potential of wealth creation
- The valuation is a method that can show how wealth is created and that can indicate a direction to go in
- Can show how an initial operating cost can become an investment and how it can be recouped by increased value of the business
- Places the owner in a position to measure the business in terms of value creation and not on the immediate profit (or loss) from a transaction
- Identifies value drivers
- Can possibly uncover areas of the business that can be exploited for greater current profit as well as long term growth
- Can identify weaknesses or areas that dissipate value
- To establish a buy-sell agreement and a method of automatic adjustments
- For updating buy-sell agreements
- Shareholder or partner disputes
- To freeze out minority owners
- Business or owner life insurance purposes
- To determine built-in gain for conversion of a C Corporation to an S Corporation
- For owners’ personal financial planning
- To use on owners’ personal financial statements
- To be used as a guide to determine retirement or buy out payments to the owner
- To indicate the value for credit purposes
- To value assets and asset impairment for GAAP, i.e. financial statement, purposes
- To be used as a guide to determine reasonable compensation
- To plan for a merger with a supplier or competitor
- To allocate costs in an acquisition or merger
- To assist the dream of going public and capitalizing the business’ value
- For gift tax purposes such as ownership transfers to a child, donations to a charity, transfers to grantor trusts or installment sales to a defective trust
- For estate tax reporting purposes
- For an estate’s division of assets where the business will go to one beneficiary and offsetting assets to another
- To assist a beneficiary in selling an inherited share of a business
- For succession planning
- To set up, or value, an employee stock ownership plan
- For stock compensation awarded to employees including restricted stock and stock option plans
- To determine a base line and value growth for phantom stock arrangements
- To value assets in a marital dissolution
- To be used for prenuptial agreements
- Valuation of business in a bankruptcy
- To distinguish between enterprise and personal goodwill
- To establish economic damages should there be a loss from a disaster and lost cash flow
- To use as a benchmark to measure the business’ “growth”
- Can provide measures of key numbers and ratios with peer companies
- To be used in or to get started with strategic planning
- To see if an independent appraiser can uncover hidden value
- To determine if there is value greater than, or separate from, the present operations such as strategic value
- To indicate how to recognize, maximize, build or grow and realize full value of strategic value
- To raise owners’ mindsets from daily operations to that of creating long-term and sustained value
- To understand the illusion of value and ways to make the value a reality. For instance, value can be lost very quickly when exposed to risks such as damage to reputation and regulatory overreach and valuations can assist in identifying the importance of this
- Creates a vaster vision for the business owners
- Periodic valuations can be a tool to track the ways value is created assisting in strengthening the business
- To help identify whether the business is a growing, stagnant or wasting asset
Valuations are serious undertakings and can be extremely revealing. When properly and thoroughly done, they can also add value. Whether an estimate of value or a full business valuation, understanding the worth of your business is a key component in informed decision-making.
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Eric S. Degen CPA, Titan Accountancy, LLC
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