Are you in need of a business valuation appraisal? If you own your business, or have even a partial interest in a business, or are considering purchasing a business, you will most likely need a business valuation appraisal at some point along the line. To help you become a business valuation appraisal expert, we’ve put together a quick guide to frequently asked questions:
Frequently Asked Questions Regarding Business Valuation Appraisals
- What’s a small business valuation appraisal?
The short (and obvious) answer to this question is that a business valuation calculates how much a business is worth. The long answer is that the value of the business is calculated differently based on the reason the valuation is needed to begin with. We’ll get into the many reasons you would need a company valuation later. But here are a few examples to answer the question:
- Perhaps your business is being liquidated. In this case, your business valuation appraisal would calculate the market value of the assets you own, to determine what could be sold to pay off your debts.
- On the other hand, if you have a profitable company, but you’re selling it or you need to gain investors, the valuation of your company would involve how much money it could produce in the future. Your valuation would involve your financial records to estimate how much money you could produce down the line.
- Finally, if you’re starting a new business and want to get some investors on board to raise some capital, you don’t have any financial history to show the earning power of the business. In this situation, the business valuation would calculate the value of other similarly-sized companies in the industry, to estimate the value of the company down the road.
The valuation that your business gets will be starkly different based on the reason you need it and the approach you take with it.
- What are the reasons for conducting a business valuation?
We’re glad you asked this question. There are dozens of reasons you might come across the need to conduct a business valuation. Since every situation is different, it’s possible that we won’t cover the exact circumstances of your business valuation, but a few common ones include:
- Conducting business transactions. If you were buying or selling a business, you’d need a valuation. If you were facilitating a buy-in or buy-out of a partner in the business, you’ll need to know the value of their ownership. If you were applying for financing of the business, your valuation would be used as collateral.
- Planning for tax compliance. You’d need a business valuation for estate planning. You would need a business valuation to establish a Family Limited Partnership or any other entity. If you want to file an estate tax return after inheriting a business, you’d need a valuation. If you use stock in the business for bonuses or incentives, you’d need a valuation to determine the value of it for tax purposes.
- For legal disputes.
No one wants to plan for this, but if the owners of a business go through a divorce, they need a business valuation to determine how to divide it or split their other assets fairly. If there is a legal dispute among shareholders of the business, the valuation comes into play. If you entered into a legal dispute over damage to your business’s success, the valuation would put a number on the damage done. If your business files bankruptcy, your valuation will be an important part of the process.
- Creating a business strategy. Your valuation might show you opportunities for growth, or to reduce wasteful spending. Your business valuation is an important part of succession planning. Valuation is important for getting adequate insurance coverage.
- Who conducts business valuations?
A business valuation involves several assumptions and estimates in the framework. Not just anyone is equipped to do this; if the assumptions are made poorly, the entire valuation is flawed. When selecting someone to conduct a business valuation, it’s important to look for a professional who has ample experience, particularly with the type of valuations you need. It’s also valuable to seek a business valuation professional who is a member of a professional business valuation organization that holds their work accountable.
Do you have any other questions? Please share in the comment section below!