What is your business worth? This is an important question most business owners will face at some point in time. A business valuation, conducted by an experienced appraiser, can increase your business and bottom line. Business valuation, simply put, is an opinion of value established by an appraiser who considers several valuation approaches to determine a business’s value.
A business valuation might be needed in the following situations:
- Selling/Buying a business (mergers and acquisitions)
- Acquiring a business loan (can help obtain an SBA loan)
- Estate Planning (keep business in the family and/or gift shares)
- Dividing business into a partnership or a partnership dissolution (changing business partners)
- Divorce (particularly important in community property states whereby the spouse is entitled to half of the marital property)
The First Step
When a business owner engages an appraiser to conduct a business valuation, the owner will need to indicate what the business is, the purpose and use of the valuation, the interest to be valued (i.e.: 100% controlling and/or some minority percentage) and the effective date. The effective date is a date established by the client upon which the value conclusion is based. Facts known as of the effective date are relevant to the business valuation process.
Business Valuation Process
An appraiser will consider three approaches to determine a business’s value; within each of the approaches are various valuation methods:
- The Asset Based Approach – (The Cost Approach) consists of each component of a business valued separately; then combined to arrive at a total value. Values of any liabilities must be subtracted from the total value of the assets to determine the value of the business.
- The Market Approach – (Sales Comparison Approach) is based on the principal of substitution. For any possible investment, there can be a similar investment. Values of comparable substitutes are determined and used to estimate the value of the business.
- The Income Approach – examines the earning capacity of the business, so a value can be derived based on its cash generating ability.