A business valuation determines what your business is worth by utilizing the three approaches – the asset approach, the income approach, and the market approach.
No matter which approach or method is used, a business valuation is essential in determining the value of your company, based on sound principles and approaches.
But, when should you have a business valuation done? Sure, you may know your business inside and out, but an expert’s opinion can give you the objectivity and clarity you need to determine a reasonable value.
10 situations where a current business valuation can be a critical asset to you and your business:
1. Family issues/divorce
When discussing or dividing personal assets and liabilities, your business will more than likely be part of the conversation. Knowing the fair market value of your business will help ensure the right value is being utilized.
2. Death of an owner
If an owner passes away, the IRS may need to know the business’ value in connection with filing the appropriate tax returns.
3. Adding new owner
If you’re thinking about bringing on a new owner, knowing the value of your business will help you establish a reasonable buy-in price.
4. Partner exit
If a current partner leaves the business, the question of “Who gets what?” is sure to happen. Having a business valuation can bring you one step closer to a decision.
5. Selling or merging your business
This is probably the most obvious situation, but knowing how much your business is worth is a big advantage when it comes to negotiating and striking a deal.
You want to make sure you’re not going to market too high or underselling something you’ve worked so hard to build.
A valuation can give you the confidence to make a good deal for yourself and your business. Or, if purchasing a company, you can be confident you’re paying a fair price.
6. Growing your business
If you’re looking to expand your business, you may need a lender or investor to give you the funds to do so.
Presenting a valuation will likely help the lender or investor decide whether or not to lend or invest and how much.
7. Developing your succession plan
Creating a succession plan doesn’t necessarily mean “retirement plan.” It could include restructuring your business, closing it, or selling.
Having an up-to-date valuation in your back pocket can help you start developing the best course of action for the future and make a better decision in the long run.
8. Rebounding from a natural disaster
A recent valuation can help with insurance coverage, in case your business is destroyed.
You’ll know the proper insurance coverage to have before a natural disaster hits, and what you can claim after. It’s one less headache after a serious setback.
9. Developing a growth plan
Understanding your current position can help determine your path to success. A business valuation can expose areas of growth, weakness, and risk to help you develop an effective growth strategy and goals for your business.
10. Gifts, transfers, and other planning
Transferring shares utilizing gifts, transfers to certain trusts, and stock-based compensation are a few of the other times when having a valuation is a must. Proper planning and documentation in many of these circumstances warrants having a business valuation performed.
Have questions about business valuations? Let’s talk!