As a business owner, you know the importance of regularly reviewing and understanding the value of your business. It’s a smart move to check whether your company’s worth has risen or declined every three to five years and to take the necessary steps to increase its value, if needed.
Of course, a lot can happen in that five-year window, not to mention throughout the lifespan of your business. There are several key times when you need to know the value of your business, from funding a buy-sell agreement to selling your company at the right price. Business valuations are the cornerstone of your succession plans, retirement plans and estate plans. But, when is the right time to get a certified business valuation, and what does that really mean for your organization?
Know the Reasons
One motivation for obtaining a certified business valuation is understanding the value of your business so you’re prepared to stand up to financial challenges. Of course if your company is looking to make an acquisition — or is getting acquired — this is another time you’ll need to determine the value of individual assets and any patents. If you are engaged in a marital or stockholder dispute, it’s critical to be able to prove your business value. The value of your business is also important when making a tax assessment for gifting purposes.
Another common reason is if you’re looking to sell a business located in a market without many comparable sales. These valuations are often used by privately held companies, like law or architectural firms, where the value is not as easily determined as public or stock companies.
Know Whom to Call
A certified valuation should be performed by a firm or appraiser credentialed by a nationally recognized association, such as the American Institute of Certified Public Accountants (AICPA), the National Association of Certified Valuation Analysts (NACVA), or the American Society of Appraisers (ASA).
A credentialed business valuation professional will have received extensive training, is in good standing, and follows specific standards and practices to determine the value of a business. These professionals are able to provide a fixed value (based on a specific date) that could be recognized legally.
Before choosing a credentialed business valuation professional, do your research. Talk to other business owners you know to see if they have recommendations. After all, you’re going to be working closely with the appraiser for the next few months.
Know the Process
Your valuation professional will review your company’s financial documents in detail, so make sure your records are in order. He or she will also take a look at the experience of your management team, market trends, competitive activity, comparable companies and recent sales of similar businesses.
Upon completion of the analysis, your appraiser will provide a written report that includes:
- All data considered and evaluated
- Procedures followed
- Methodologies considered (should ideally use multiple valuation methods for substantiation)
- Assumptions and limiting conditions
- Opinion of value
A comprehensive, certified business valuation can take six to eight weeks to complete, depending on the complexity of your organization. So consider the timing of your needs before making a decision.
Know the Costs
Certified business valuations not only take some time to complete, but also can be quite costly, ranging from $5,000 to $50,000 for an especially complex process. That’s why many business owners work with their CPA or another Financial Professional to develop their own business valuation. These simpler valuations may be appropriate for setting up buy-sell agreements, retirement plans, life insurance purchases, estate tax planning needs and succession plans. Speak with your legal, accounting and tax advisors for additional guidance.
Know What to Do Next
Whether you need a certified valuation or not, it’s important to bring in a qualified, knowledgeable professional early in the planning to guide you through the process and help set expectations so you can make the right decisions for your business.