Why Do I need a Business Valuation?

Suzanna DeBaca -- Expert Business Source, 3/5/2007 7:53:00 AM

One of the standard questions I ask business owner clients when starting financial and investment planning is if they’ve had an outside business valuation. Many entrepreneurs and business owners have never determined the value of their company other than having an idea of book value. Getting a formal valuation from a business assessor is a valuable exercise for a variety of reasons.

Raising Capital: If you are seeking new capital from the marketplace, investors will demand a business valuation. They’ll want to look at not only book value but also earnings and comparable valuations from similar businesses in your industry.

Protecting Your Business:
If you are in a partnership or have multiple owners, your business valuation is an important component of preparing and funding a partnership agreement. A valuation is a critical determinant in obtaining buy-out funding so that each owner knows the worth of his or her shares of the company.

Estate Planning:
Your ownership in your company is one of your personal assets and is included in your estate. If you don't have a reliable valuation for your company, it increases the chance the IRS could calculate one in the event of your death much higher than you think reasonable. Having an outside assessment of your company creates a legitimate valuation that the IRS is likely to accept.

Selling Your Business:
If you sell your business, there is no question that you will need a valuation. Your estimation of your company’s worth and your potential buyer’s estimation will probably differ. Having this knowledge in advance will help you in positioning your firm to obtain the highest price.

There are a variety of methods used to value businesses. Most fall into three catagories, which are Asset-based, Earnings-based, and a combination. Consult with your advisors to find out which is the best type of methodology for your specific business or engage a professional, who will know what is the standard for your industry specialization.

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Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual