What do you need a business valuation for?

Mar 28, 2024

That is the key question to ask yourself.

Why do you need a business valuation?

Common reasons or triggers for needing a business valuation include:

  1. Tax matters: settling an estate or gifting shares.
  2. Divorce settlement and allocation of the assets including the valuation of a privately held business.
  3. Shareholder Dispute: the valuation is used to settle a dispute among shareholders.
  4. Sale of a Business: a business valuation is needed to determine the fair market value of a privately owned business including marketability for the business owner or a prospective buyer.
  5. An Appraisal Review: in this situation, an independent and objective review of a business valuation is requested including an opinion on its quality.

For any of the above triggers or needs, the business valuation needs to stand up to scrutiny. Scrutiny meaning the business valuation needs to support how and why the valuation was determined. While you are focused on the final valuation number, the parties who will scrutinize the business valuation are much more interested in understanding how that valuation amount was determined. The parties who will scrutinize a business value in the case of the above triggers (e.g., the IRS, a judge, a prospective buyer, a shareholder or owner of the business, a spouse, a family member) need to review and understand how the valuation was determined. When questions arise, there needs to be clear and supporting evidence and analysis to support the opinion of value.

An example: If you were seeking to buy a business and the business owner had marketed the business based on a limited valuation approach you as the prospective buyer are going to complete your due diligence to assess the marketability of the business. You as a prospective buyer do not want to overpay. A thorough and detailed business valuation will provide you the supporting details of an in-depth analysis of the marketability of the business, including in-depth analysis of its location, traffic flow, management, labor, available parking, and other factors that could greatly affect the business valuation.

If the above are triggers for your need for a business valuation. Do not take a short cut. Do not settle for a brief, high-level, cursory analysis of the business. You risk spending more time and money in the long run. For any of the above matters, the stakes can be high in relying on an inaccurate and incomplete business valuation.

If you need a business valuation, ask yourself, why do I need this? If you are simply curious as to what your business is worth, there is no need to invest in a business valuation prepared by a certified business valuation professional like me. Just be clear as to what you need as the positioning of calculation assignments are gaining steam and are limited in value and may cause more headaches. Read our recent article.

Invest in protecting your interests and invest in a business valuation prepared by a certified business appraiser, not a professional whose primary job is not business valuations. Business valuations have become complicated with lower cost, lower value offerings that do not satisfy the requirements of the above referenced triggers. Do your homework. I am happy to speak with you to assist you in assessing what you really need for a business valuation. 

When Values Matter.  Contact us.