Why Do A Business Valuation?

By Leonard Holler, Wyoming Entrepreneur – Small Business Development Center Regional Director and Certified Valuation Analyst.

Gil in Cody, Wyoming asks, “Why would a small business owner, like myself, need a valuation done? I am not trying to sell my business.”

At first it might seem that the only reason for a business valuation is for no more than the casual interest of a business owner. The fact is that there are as many kinds and varieties of values as there are reasons for valuing a business.

In some recent articles in Inc. magazine and Entrepreneur magazine, they conclude that business valuations are important for businesses of ANY size – and not just when a business is being bought or sold. Inc. magazine stated – “A business's success is ultimately measured by a business's value…. Knowing your net worth as a private business owner provides a useful snapshot of where your company stands, what options it has, and how it can improve in the long term." In short, business valuations are a significant planning tool for small and large businesses alike.

They are used in various business situations and can be impacted by any number of circumstances. Some of the common uses of business valuations include –

• Determining the price to buy, sell or merge a business.

• A reality check of your business performance.

• A tool for developing employee and business improvement goals.

• Setting prices for adding new shareholders, new stock purchases or buying back shares from existing shareholders.

• Helping determine the business owner’s personal net worth for estate planning, insurance requirements and financial planning.

• Obtaining or even maintaining financing options.

• Employee stock ownership plans (valuations are required by ERISA).

• Stock bonuses or other compensation incentive plans.

• Going public and IPO research.

• Feasibility of management or leveraged buyouts.

• Divorce proceedings of owners and shareholders.

• Various litigation support documentation.

• Mediation and arbitration of disputes between shareholders or business partners.

• Value of business spin-offs.

• Bankruptcy, business liquidation or reorganization decisions.

• Exit strategy planning and development.

• Conducting due diligence on mergers or acquisitions.

Business owners also need to periodically evaluate their own performance. Financial ratio analysis and business valuations can help them objectively determine their management effectiveness. This is not the only measurement of how well a business is operating, but can give you reason to ask more questions about how you operate your business.

Comments

[Peter]

I agree 100%. In order for any business, small or big, to improve, it needs to know its value as a planning tool to continue doing business. It's like getting to know you better to succeed in life. Business owners have to do a business valuation from time to time to find out if they are doing the right thing or making mistakes that will eventually ruin their business.

[Debbie]

Business valuation is essential for better planning. It is an interesting subject and a lot of business owners should take time to do so. Thank you.

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[Matthew Engquist]

Valuing your business will tell you how much it is truly worth – it will tell you whether you’re catching up with the market or not. It is like an open opportunity to improve sectors of your business and set new goals to achieve.

[Ernest Branson]

Having a market valuation prepared prior to starting a sale process is a key step in understanding your business’ position. If properly undertaken the valuation will give an accurate gauge to the price range you may achieve and is an essential starting point for any future negotiations.