Business valuation provides figures regarding the actual worth or value of a company in terms of market competition, asset values, and income values. Many business owners find themselves in at least one situation (or more often than not, several different situations) where having a valuation done for their company is beneficial or even statutorily required.
The following outlines several potential benefits to obtaining a valuation of your company.
Knowledge of Assets
First and foremost, it will give the company a better knowledge of its assets. It is important to obtain an accurate business valuation assessment because estimates are not always acceptable as they are simply generalizations. This will also help in knowing how much to reinvest into the company. It can also help indicate an appropriate selling price for the company.
Protecting the Value of the Business
Having a well prepared and reported business valuation will highlight weaknesses in the business. This provides the opportunity for business owners to mitigate these weaknesses and prevent further loss of value. Also identified in the valuation process will be any threats to the business. This will again provide an opportunity for the business owner to be proactive in combating those threats.
Enhancing the Performance of the Business
Having an annual business valuation may be used as a benchmark to assess the performance of the business. It will help to evaluate the business’s execution of the corporate strategic plan and provide objective information to shareholders. This information can be used in evaluating management and help with making the appropriate changes. A business valuation provides performance measurements and promotes accountability within the ranks.
Knowing Your Company’s True Value
Most companies have a general idea of what their business is worth. They can base this upon simple data such as stock market value, total asset value and company bank account balances.
However, there is much more to business valuations than those simple factors. Having a reputable valuations company prepare your business valuation will ensure that correct figures are provided. If selling the business becomes a possibility, having these figures and a true value of your company is often a deciding factor. This information will show the company income and valuation growth over the course of the previous five years. Potential buyers will want to see this information.
Understanding of Resale Value
Getting a business valuation provides an understanding of company resale value. Obviously, this is most important if you are contemplating selling. You must know its true value and should get this valuation far before putting the company on the market. This will give you an opportunity to take more time to increase the company’s value to achieve a higher selling price.
Knowing your company’s resale value is necessary for negotiations. It will arm you with the relevant factors that impact the value of your business to easily relay them to potential buyers. Most of the time buyers are savvy investment professionals. They purchase businesses as a regular aspect of their line of work, so you need to be ready with the facts.
Mergers or Acquisitions
Should a merger or acquisition opportunity arise, you will be prepared to show them what the value of your company is as a whole, what its asset withholdings are, how it has grown, and how it can continue to grow. Companies may attempt to acquire your business or merge with it for as little money as possible. This will give you negotiation leverage to make sure that you are not undercut.
Reject the offer if they offer less than the value of your company and hopefully you can negotiate an agreement with the information you have.
In Preparation for Unsolicited Offers or Unforeseen Events
As a business owner you may receive unsolicited offers for your business and not be prepared for it. You may not have a solid grasp of the value of the business. You may be relying on distorted market information, which involves vague details related to the terms of the transactions. This creates a false value of the business without the benefit of reliable market information and availability of details surrounding the transactions.
An unforeseen event such as a death or disability of a business owner may occur. This may trigger a buy-sell agreement and the need to redeem or sell partial or full interests in the business. When a business has obtained a business valuation on a regular basis, they are better prepared for such circumstances. The expectations related to such scenarios are better managed, and consequently better outcomes are realized.
Having the valuation will help avoid any buy-sell disputes for private businesses that have multiple parties that hold equity. The appraiser can play a critical role in assisting legal counsel in defining the level of value during establishment of the buy-sell agreement. That way the appropriate level of value may be used given the specific event that triggers the buy-sell agreement. Having an annual valuation sets a precedent for the value of the equity. When you have a single valuation that is prepared at the time a triggering event occurs, this is more susceptible to claims of bias.
Third Party Interest in Valuing the Business
Multiple parties will either explicitly or implicitly value your business whether or not the business owner chooses to engage a business appraiser of their own choosing. The bank will use its own approach to valuing the business when a business owner seeks to secure a business loan.
Prospective buyers of your business will have their own assessment of the value of the business. When these potential buyers seek to secure a loan, again the bank will use its own approach.
Lastly, the Internal Revenue Service will have a vested interest in the valuation of the business if the business is sold or is left in a business owner’s estate. Accordingly, being fully informed as to the value of the business through a business valuation is common sense.
Access to More Investors
An investor is going to want to see a full company valuation report. So, if you are seeking additional investors, this is an important tool to have. Providing them with a valuation projection based upon their provided funding is also a good idea. They like to see where their money is going and how they will get a return on the investment. A potential investor is more likely to proceed when they can see that their funds will carry the company to the next level, increase its value, and put more money back into their own products.
Assisting in the Development of Dividend Policy
Earnings of a business can be used to reinvest back into the business, pay down outstanding debt or distribute dividends to the owners. Dividends have a direct impact on the revenue of the private business interest. The business valuation is a critical input system to determine return on the business investment. Once this information is determined, it will lead to prudent decisions on how to best utilize earnings.
Managing Tax Transactions Efficiently
To a private business, a well-documented business valuation is frequently an essential component of effective tax planning strategies. For example, characterizing income tax incentives to key executives as capital gains rather than ordinary income may be supported by tax planning structures that rely on sensible valuations. The commonly used technique of valuation of business interests on a small interest basis provides reduced estate and gift taxes when smaller interests are sold or transferred to family members.
Once you have obtained your business’ valuation, set new goals to increase the company’s value over the next year. Compare each year’s valuation to the last to measure growth, losses, and to evaluate where room for improvement is. Having the knowledge of what every component of your business is worth is invaluable information for business owners to have.
All of the above reinforces the proposal that a business owner is well served by having a business valuation prepared on a regular basis. It puts the business owner on a level playing field when having to make important decisions relative to their most important asset.
Bowers & Company CPAs aims to offer helpful information to our clients and friends. Learn more about how we can help should your business need a business valuation and/or accounting and financial services.
Disclaimer: To ensure compliance with requirements imposed by the Department of Treasury, we inform you any U.S. federal tax advice contained in this document or video is not intended for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.