Why business valuations

Make sure those years are golden, not tarnished. A business valuation helps you plan your exit strategy with less worry for all. Knowing the real value of your most prized asset allows you to protect it best. You need to protect your business as it operates, but life can also get ahead of you.

You must protect your business in case of taxes, legal challenges, death or divorce, and in divorce, the appraisal of the business as an asset will come up. Plan ahead before you make your succession or sale plan — a pre-plan if you will.

Succession is all about planning for success. Many business owners plan their succession out with a timeline covering at least five years to a decade, and that will include receiving annual business valuations to stay on track. A business valuation helps you weigh the pros and cons through assessment before succession or making a sale. You can look at what you need to improve in the business or realize more aspects of your mission before passing the reins on. What happens when one of your partners wants to sell their share?

Buy-sell agreements can disrupt the company, particularly when that company is small, but it keeps the business in the hands of the current owners and can make the transition smooth when you have a business valuation. If an owner becomes permanently injured or wants to retire, buy-sell agreements with partners help determine how the buyout will be funded along with other terms, to reach a fair agreement.

Annual business valuations can help companies revisit buy-sell agreements to keep them updated. Your business may hit a rough patch. You may need an extra financial push to grow. Maybe you are ready to acquire a new business. Lenders often require a business valuation before signing off on loan, depending on the size and type of business. Specialized businesses may face more unique challenges in the economy and their respective markets, so values understandably shift.

A business valuation is a general process of determining the economic value of a whole business or company unit. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings.

Owners will often turn to professional business evaluators for an objective estimate of the value of the business. The topic of business valuation is frequently discussed in corporate finance.

Business valuation is typically conducted when a company is looking to sell all or a portion of its operations or looking to merge with or acquire another company. The valuation of a business is the process of determining the current worth of a business, using objective measures, and evaluating all aspects of the business. A business valuation might include an analysis of the company's management, its capital structure , its future earnings prospects or the market value of its assets.

The tools used for valuation can vary among evaluators, businesses, and industries. Common approaches to business valuation include a review of financial statements, discounting cash flow models and similar company comparisons. Valuation is also important for tax reporting. Some tax-related events such as sale, purchase or gifting of shares of a company will be taxed depending on valuation. Estimating the fair value of a business is an art and a science; there are several formal models that can be used, but choosing the right one and then the appropriate inputs can be somewhat subjective.

There are numerous ways a company can be valued. You'll learn about several of these methods below. Market capitalization is the simplest method of business valuation. For example, as of January 3, , Microsoft Inc. Under the times revenue business valuation method, a stream of revenues generated over a certain period of time is applied to a multiplier which depends on the industry and economic environment. For example, a tech company may be valued at 3x revenue, while a service firm may be valued at 0.

The earnings multiplier adjusts future profits against cash flow that could be invested at the current interest rate over the same period of time. The DCF method of business valuation is similar to the earnings multiplier. This method is based on projections of future cash flows, which are adjusted to get the current market value of the company.

The main difference between the discounted cash flow method and the profit multiplier method is that it takes inflation into consideration to calculate the present value. The book value is derived by subtracting the total liabilities of a company from its total assets.

Liquidation value is the net cash that a business will receive if its assets were liquidated and liabilities were paid off today. This is by no means an exhaustive list of the business valuation methods in use today. Other methods include replacement value, breakup value, asset-based valuation and still many more. In the U. Many states allow businesses to merge, dissolve, or restructure without unanimous ownership consent. This may result in a dispute that requires a valuation as part of the settlement process.

Inconsistent and inappropriate allocation of the purchase price may increase tax liability and even penalties. A valuation analyst will consider the differences in business goodwill over personal goodwill and the various state laws applying these transactions and calculations. Often both sides obtain separate valuations, but there is also a movement toward collaborative divorces in which the parties agree to hire a single valuation analyst.

Typically, financial statements are presented at a historical cost. A valuation will provide the bank with fair market value amounts that can support a loan. ESOPs provide capital, liquidity, and certain tax advantages to those private businesses whose owners do not wish to go public. A valuation must be performed annually for an ESOP. This valuation determines the price per share for the beneficiaries of the ESOP plan. It is a significant valuation because the ESOP trustees may be held personally liable if a beneficiary receives less than the stock's fair market value.