Valuation
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When and Why Get a Valuation
A business owner should secure a business valuation at several key points in the lifecycle of the business. Here are the most important times when a valuation is typically necessary:
Before Selling the Business
When considering selling the business, a valuation helps the owner understand its fair market value. It provides a solid basis for negotiations and helps identify potential areas to improve value before going to market.
Periodic Check of Business Health
Even if no major transactions are imminent, periodic valuations can be helpful for strategic planning and benchmarking the business's growth or financial health over time.
When Seeking Investment or Financing
If a business owner is seeking outside investment, securing a loan, or issuing shares, a valuation helps establish credibility with investors or lenders. It shows the financial health and potential of the business.
Partnership Buyouts or Mergers
During buyouts, mergers, or acquisitions, a valuation is essential to determine the financial stake of each partner. It helps in negotiating the terms and pricing of the deal.
Estate Planning and Succession
When planning transfer of ownership, such as passing the business on to the next generation or liquidating it, a valuation helps in estate planning and tax preparation.
Divorce or Legal Disputes
In case of a divorce or legal dispute involving the business, a valuation may be required to divide assets or settle claims.
Employee Stock Ownership Plans (ESOPs)
If offering stock to employees as part of an ESOP, a formal valuation is needed to ensure proper share pricing and compliance with legal requirements.
Every 3-5 Years for Stable Businesses
For more mature businesses that are stable and not expecting significant changes in ownership or operations, a valuation every three to five years is usually sufficient. This helps maintain an updated understanding of the business’s worth and can be useful for long-term planning.
Summary: BE PREPARED
Much like monitoring personal investment performance, conducting regular business valuations is crucial for evaluating a company's financial health and growth potential. A comprehensive valuation provides insights into the current market value, highlights strengths, and uncovers opportunities for improvement. By consistently assessing your business, you can optimize operations, enhance profitability, and increase long-term value. Additionally, aligning your business's value with your overall financial portfolio offers a clearer and more integrated view of your total financial worth.
Case Study
Recently, I was asked to prepare a valuation for a business that was in the process of self-selling and had received an offer. After conducting a thorough analysis of their financial performance over the past three years and comparing it to similar businesses sold in 2024, it was clear that the business had been undervalued by $300,000. This assessment, properly documented, increased and justified their value by 35%, from a price of $850,000 to $1,150,000.
