9 Reasons Why You Need a Business Valuation
Photo by Lukas from Pexels
Your business is probably your single most valuable asset, yet most business owners have no real idea of the true market value. Many business owners believe they only require a business valuation when selling their business – this is a mistake.
A valuation is necessary for setting the sale price of your business but it’s also essential for many other business and legal purposes. Considering this, you should always have a current business valuation on hand. To safeguard against a variety of unknowns, have your business valued annually.
Knowing what your business is worth is invaluable information to help you prepare for the future. Here are some of the top reasons to have your business independently valued:
Funding. A comprehensive valuation puts you in the best position to negotiate with banks or other investors, as it lets them see where their money is going and, when paired with a projection based on the valuation, how it will deliver a return on their investment.
Partnerships. If you’re entering a partnership or LLC, a valuation will help you determine the right buy-in price. Likewise, if you or a partner decide to leave the partnership, a valuation forms the basis of an agreeable buy/sell agreement.
Better Planning. With a business valuation, you are empowered to make informed decisions critical for the success of your business, such as ensuring you have adequate insurance, how much to reinvest in your business, and how to time your exit strategy.
Estate Planning. Your business may be a large part of the estate you intend to leave to loved ones, and the last thing you want to do is leave them with a hefty estate tax bill on an undervalued business.
Exit Strategy. If you’re contemplating retirement or other exit strategies, knowing the value of your business is essential to a well-formed plan, whether you intend to sell, close the business, or simply restructure.
Mergers and Acquisitions. If you plan to buy or merge with another company, a business valuation is instrumental in determining if the price you are being asked to pay is fair.
Marital Dissolution. Your business is most likely your largest joint asset, and a valuation is necessary in order to ensure a fair and accurate settlement.
Litigation. If a valuation issue rises to the level of litigation, the testimony of a Certified Valuation Analyst will strengthen your case.
Converting from a C-corp to S-corp or LLC. A valuation as of the conversion date will determine the tax calculation for the IRS. If the business is sold prior to the ten-year holding period, there will be tax due on the built-in value increase, starting from the date of conversion.
Once you have a business valuation in place, incorporate it into your strategic plan and set goals with the aim of increasing your company’s value. Getting a business valuation annually allows you to compare the numbers year-by-year to see what’s working and what needs improvement. Need help? Contact our Certified Valuation Analyst Todd Ringler.