An independent appraisal can be a starting point for long-term planning–or a needed reality check
Whether your business is just getting established, in growth mode, or has reached maturity, it is important to understand its value. An independent business valuation can serve as a starting point for long-term business planning, or a much-needed reality check for owners with unrealistic expectations about the sale of their business.
A business valuation or appraisal of value is usually conducted by a professional credentialed appraiser who inspects and analyzes the entire business, including assets, depreciation, and other factors. From there, the appraiser applies certain methodologies, depending on the industry and circumstances, to arrive at a reasonable assessment of value.
In some circumstances, such as the sale of a business, more than one valuation method may be applied. This way, the buyer, seller, and lender, can get a clearer picture of how the business will perform over time. A professional credentialed appraiser would likely follow the Uniform Standards of Professional Appraisal Practice (USPAP).
9 Reasons Why You Would Need to Know What Your Business Is Worth:
- Selling a Business. A professional valuation is necessary to give you a clear, objective assessment of your business’s fair market value based on its current condition. It will help you set a realistic asking price, give you more confidence during negotiations, and give the buyer more confidence in making the purchase. It may also be used by lenders for financing.
- Exit Planning. At some point, every owner will exit their business. A business valuation will help you plan your future. It will give you a baseline assessment of your assets and the current condition of your business. It will reveal any gaps between what you currently have and what you need. It will help you choose the best option and create a plan to meet your goals.
- Growth and Expansion. A business valuation will uncover opportunities where your business can grow revenue, for example adding subscription-based products. It can help you identify areas where you can cut costs, identify gaps in cash flow, or operate more efficiently.
- Attracting Investors. It is not unusual for a successful business to grab the attention of private equity groups or venture capitalists. A recent business valuation can offer a complete snapshot of the business, its financial health, structure, and future earning potential.
- Obtaining Financing. Whether you need to buy new equipment, remodel, or meet payroll, you want to be fully prepared for obtaining financing. Presenting the lender with a professional business valuation, including detailed financials, will help streamline the process.
- Insurance Coverage. To get your business properly insured, a detailed business valuation can help you determine the amount of coverage you need. Your business valuation could influence payouts for a co-owner life insurance agreement, as well as payouts for natural disasters.
- Divorce. During a divorce, the distribution of assets and liabilities, anything spouses buy, build, or acquire during the marriage, may also include a business. A professional, unbiased business valuation will help both you and the court make an informed decision.
- Buying Out a Partner. It is not uncommon for one business owner to decide he or she wants to divest ownership. Similar to when one owner dies, the remaining parties must retain a professional business appraiser to determine a fair market value for a buy-out of the ownership interest.
- Succession or Estate Planning. If something happened to you, do you have a plan in place to protect the future of the company? Would you choose a family member to run the business, or would you prefer to leave it to your partner or a key employee? A recent business valuation with up-to-date financial records would help this person get your estate in order.
Just like going in for regular checkups on your health and wellness, you also need to check up on the health and wellness of your business. You may be unexpectedly approached by someone who wants to invest in your company. Or, you may find your self in a precarious situation requiring you to obtain financing. In any case, knowing what your business is worth will give you the confidence to move forward in the right direction.
The opinions expressed within this article is that of Bob House and not that of M&T Bank, nor does M&T Bank endorse the opinions.
This article is not intended to provide tax, legal, accounting, financial, or other professional advice. Always consult a qualified professional about your personal situation.