You might have a rough idea of what you think your business is worth, but have you ever taken the time to get a professional valuation from someone who affixes price tags to business for a living? If not, now may be the perfect time.
Why Having Your Business Valued is Imported
Business owners often spend time speculating what their businesses are worth. But this isn’t something that you should guess. Whether you’re planning to sell your business soon, keep it in the family, or merge with another company, you always need to have a pretty accurate idea of how much the business is worth.
Here are several specific reasons why having your business valued by a professional is so important:
1. Succession Planning
The first reason to have your business valued is for succession planning purposes. Examples include:
- Your business could be gifted or transferred over to an adult child or other family member.
- The business could be sold to employees, a third party, or another company as part of a merger or acquisition.
In order to accomplish any of these things, you have to have a clear understanding of how much the business is worth. By getting a professional valuation, you’re able to make much more educated decisions on the future of your business.
2. Estate and Gift Tax Considerations
It’s possible that you’ll need a business valuation in order to file an estate tax return. It obviously depends on the specifics of your situation and which federal or state estate taxes are involved, but you’ll most likely be required to have a business valuation. This is something you can speak to your CPA or attorney about.
3. Buy/Sell Agreements
When it comes to planning your exit as part of a buy or sell agreement, having a business valuation gives you a clear path forward. (Without it, you’ll have trouble working through the specifics of a deal.) It also helps with timing.
“By considering the current value of your business, the factors impacting its valuation, your company’s projected financial future, and your ultimate goals, you can estimate the best and financially lucrative time to exit,” Apex Business Advisors explains. “With an exit date in mind and confirmed feasible for your goals, you can begin confidently planning.”
Some sort of mutually agreed upon value is a requirement in order to set up a serious buy/sell agreement. You’ll definitely need to have something on file in order to go down this path.
4. Divorces
When one or more business owners goes through the process of dissolving a marriage through divorce, a valuation may be required in order to aid in the division of marital estate. Even if the business stays intact and no ownership changes, the attorneys involved need the ability to value the business in order to fairly divide other assets.
In many cases, both sides will obtain separate business valuations in a divorce. However, in some situations, the two will mutually agree to hire a single valuation analyst. Either way, these figures are important when reaching a divorce settlement.
5. Financing
When it comes to financing, most financial institutions, including traditional lenders and banks, will require a business valuation in order to underwrite and approve a loan. This is especially true when acquiring another business or some sort of business interest. (If you’re working with the Small Business Administration on an SBA loan, you can pretty safely assume you’ll need a valuation.)
6. How Much is Your Business Worth?
At the end of the day, knowing the value of your business provides clarity. Whether you’re planning to make a major change soon or not, it’s helpful to know what your business is worth. It’s most likely an integral part of your retirement or financial security. Knowing whether it’s worth $500k, $1 million, or $5 million, or more is valuable information to have.
When getting your business valued, definitely use a professional. There are plenty of online formulas and calculators you can use, but a dedicated professional or business broker is going to give you the most realistic figure based on the current marketplace, recent comps, and other factors. Don’t cut any corners here!
