As a business owner, one of the most important questions you need to answer is: What is my business worth? However, that question is not necessarily one you can answer by yourself. Therefore, when contemplating your exit options, you should consider receiving the advice of a professional through business valuations services.
What is a Business Valuation?
A business valuation is a formal process to estimate the value of a business. It relies on the professional judgment of an analyst who weighs the nature of the business, its financial performance, local and national economic conditions, values of assets and related liabilities, plus any unique know-how or proprietary technology to arrive at an estimate of the value of the business.
Reasons You Might Need Business Valuation Services:
- Change in ownership as part of succession planning or retirement
- Gifting shares of a business to children as part of a succession plan
- Merger or sale to another entity
- New shareholder or partner coming on board
- Raising investment capital
- Establishment or annual update of an employee stock ownership plan (ESOP)
- Going through a divorce
- Estate tax purposes
Whatever the reason you need business valuations services, you will be best served if an experienced professional perform the work. While no credentials are needed to perform a business valuation, hiring an analyst who has some kind of certification ensures their work will be performed according to professional standards.
3 Approaches to Business Valuations
Because every business is unique, there is no rule of thumb methods that will result in a reliable and defensible value. Valuation analysts use three main methods for their calculations
Asset-based approach: This method frequently results in the lowest value and is commonly used to set a floor for the value of a business. An analyst using this approach will determine the fair market value of the assets less any related liabilities. This approach may look at the collection of assets as components of a business that will continue as an ongoing concern, or it may assume a liquidation value as if the assets were to be sold at a fire sale.
Income-based approach: As the name implies, this method relies on the income the business generates. Typically, a weighted average of recent historical data is adjusted to result in a hypothetical stream of cash flows that a successor owner would receive. This stream of cash flows is then discounted to its present value.
Market approach: With this method, an analyst will look at recent sales of comparable businesses as reported in databases compiled by business brokers. The analyst may need to adjust the actual sales prices to reflect differences between the businesses sold and the business being valued.
A Look Into the Process
Most appraisals start with an analysis of your financial statements, and a company questionnaire. This data-gathering process is the hard part for you because it involves gathering a large amount of financial and operating information on your company. An appraiser typically needs 3-5 years of your profit and loss statements and balance sheets, in addition to specific information on your company.
Once the appraiser has this information, they will then normalize or adjust your financial statements. This step involves making adjustments to your financial statements, so they can be compared to others within your industry. The appraiser will need to communicate with you during this process and your involvement is key to the accuracy of the appraisal. If they don’t contact you, you must contact them. Don’t be afraid to step up and ask questions during this process.
Once this step is complete, then the appraiser will compile the report based on the information you have given, as well as information the appraiser has already obtained about the industry.
Who Will Value your Business?
CPAs and business appraisers are best used when obtaining a valuation for legal purposes. When obtaining an appraisal for legal purposes, you should choose a business appraiser, which is someone that specializes in business appraisals, especially those for legal purposes.
Intermediaries, such as business brokers and M&A advisors, are best used when you want a valuation to help with selling your business, or to help you weigh your exit options. When selling your company, you do not need an appraisal that can be used in court. As a result, the advisor can produce a shorter report, which will save you money. They also have actual real-world experience selling companies, which can be invaluable.
Limitless Investment and Capital’s Business Valuation Services in Phoenix
Limitless Investment and Capital offers business valuation services using an in-depth understanding of accepted valuation methodologies to produce a defensible report for appraisals and fairness opinions. Combining Limitless Investment and Capital ’s business valuation services in Phoenix with our tax, transaction advisory services, accounting and financial expertise within Limitless Investment and Capital ’s Family of Companies, we can effectively customize services across divisions all under one roof.