Although business owners often know their companies from front to end, many do not understand the true value of their business on the market. However, understanding what your company is truly worth is often critical, especially before you decide on your succession plan. In fact, a realistic comprehension of your company’s worth is crucial to achieving goals and optimally utilizing business resources, regardless of the specific situation.
In the content below, we explore the importance of business valuation services to determine the true value of your company at any given time.
When Does a Business Need a Valuation?
Although comprehending the value of your business is beneficial at any time, specific situations often require professional review. Valuation is especially helpful in the following cases:
- Sale or merger of business
- Estate tax purposes
- To determine capital gain
- Onboarding a new partner or shareholder
- Marital dissolution cases
- Buy-sell agreement business transfer
- Raising investment capital
- Interest by gift business transfer
- Gifting business shares as part of succession
- Establishing/ updating employee stock ownership plan (ESOP)
- You have not valuated your business in a year or longer
The Benefits of Business Valuation
Many business owners only have an idea of what their company is worth. Unfortunately, an inaccurate understanding of business worth can be costly. For example, owners may undersell their businesses or miss out on tax-saving strategies.
On the other hand, business valuation services provide you with a comprehensive overview of the actual worth of your company, allowing you to set goals accordingly and make informed, profitable decisions.
1. Valuation Provides an Accurate Picture of Company Assets
Simply estimating business assets does not put the business owner in a position to make informed decisions and set proper goals. For example, understanding company assets allows company owners to receive accurate insurance coverage and negotiate effectively with potential buyers.
2. Valuation Reveals Company Resale Value
Whether you plan to sell in two, five, or ten years, you should understand the resale value of your company long before the business is on the market. Comprehending value – including strengths and weaknesses – before selling allows you to increase business worth, showing valuation growth and likely achieving a higher listing price when the time comes to sell.
Once the valuation is complete, work to boost profits, invest, improve processes, lower expenses, and increase sales with your gained insight.
3. Valuation Provides Broad Access to Investors
Investors often expect a full company valuation report when approached for business investments. Thus, if you foresee extreme company growth or periods of severe draught, prepare to approach investors now by receiving a complete business valuation.
4. Valuation Offers Insight into Mergers or Acquisitions
During a business merger or acquisition, knowledge is often negotiating power. When an interested party approaches your business with an offer, you should be able to present an accurate picture of company value, asset withholdings, past company growth, and projected success. Without accurate insight into business value, purchasing parties may acquire your business for less than it is worth.
Business valuation allows you to make informed decisions, either negotiating for a fair deal or rejecting undervalued offers.
5. Valuation Reveals Accurate Company Value
Rather than utilizing market data to compile a rough business value estimation, understanding immediate company value is priceless information for a business owner. Appraising valuation growth over the course of time is also important. Investors or potential buyers often look for companies with consistent growth and the potential of future success.
Business Valuation Services: Fair Market Value vs. Fair Value
Professional business valuation services are designed to determine the true value or worth of a company. This value may be referred to as fair value or fair market value. Although the terms sound interchangeable, both methods of determining value are distinct.
Fair Market Value
Fair market value is defined by the IRS as:
The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge or relevant fact.
Essentially, the fair market value provides business owners with an accurate idea of what their business would be valued in a fair marketplace sale. IRS-controlled transfers, estate transactions, or the sale of a business on the open market often receive a fair market value during business valuation.
The Financial Accounting Standards Board (FASB) defines fair value as:
… The price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability.
The noticeable difference between fair value and fair market value is the use of the word “market.” Although fair value is the basis of business valuation, market discounts are not always considered. Thus, fair value is often calculated during shareholder disputes, marital dissolution cases, or buy/sell agreements dealing with internal share transfers.
DHJJ: Delivering Expertise in Business Analysis
The best way to determine business value is by seeking the services of a qualified appraiser. Simply put, attempting to determine true value on your own may result in missed opportunities, inaccurate results, and costly mistakes.
At DHJJ, we will provide a realistic understanding of your company’s worth, established by insight from experts qualified by the National Association of Certified Valuators and Analysis.
Our experts will know your business inside and out. They also know the complexities of economic and industry trends in your sector. To reach out about planning the future of your business, please do not hesitate to call 630-420-1360 or fill out our online contact form!