What is a Business Valuation and When Do You Need One?

Why a Business Valuation?

Many business owners, business buyers, business sellers, and many others desire business valuations for a wide variety of functions. Those purposes vary from considering the purchase or sale of a business to complying with a court order to settle a legal issue. Often, business owners just need to have a notion of the present value of their business. 

Here are some of the reasons people visit us or use our business valuation program tool for business valuation in Alberta.

Curiosity

As people like to look at their stock portfolio from time to time, small business owners prefer to get an idea of the company’s worth and changes in its value. Our valuation tool can give you a good idea of your business’ worth, based upon your answers to several financial and non-technical queries. A basic valuation is free!

Purchasing a Business, Initial Evaluation

Often, business buyers are confused as to how a seller arrives in an asking price for their business. Sometimes, the asking price is not predicated on any rhyme or reason. Before becoming too involved in negotiating a business acquisition, it is a good idea to find out if the asking price is in the ballpark. A difference of 10% to 25% (requesting price. independent valuation) is usually bridgeable. But if the distinction is a whole lot more than 25% or so, chances of buyer and seller getting into an agreement are pretty slim.

Buying a Business, Offer & Negotiation Stage

Once it is determined that sellers and buyers are in the same ballpark, a more formal appraisal will be very helpful. It is one thing to ask a vendor to lower his price by 20 percent; It’s quite another to show that seller an independent valuation that details the reasons for the offer price. Click here and learn about working capital.

Selling a Business, Historical Preparation

The decision to market a business rarely occurs overnight, and neither should the preparation. The time to start planning for the selling of a business is just 1 to 3 decades before the goal date of the sale. A key element of preparation is an objective opinion of your business’s value. That is important not only for setting reasonable expectations and a fair asking price. It’s also significant because there are several clear steps you can take to enhance the worth of your organization and also make the sale easier and faster if you start planning.

Selling a Business Within One Year

If you’re planning to provide your business available within a year, it’s time to get a valuation alongside a little expert advice. Setting the wrong asking price, or perhaps the right asking price without documentation to support it can be fatal. Additionally, there’s a great deal you can and should do to make the business more salable (and more valuable) if you don’t wait until its too late.

Taking on a New Partner or Buying Out a Current Partner

Note that in this context we are utilizing a spouse to mean any person or entity which has ownership. This is a stockholder in a company, a member of an LLC, or even a partner in the legal sense; a partner in a partnership entity.

More often than not there’s a difference of view regarding the value of one’s partnership (or stock or membership share) at a tightly held company. A third party valuation is the best approach to reevaluate disagreements and arrive at a fair buyout (or buy-in) deal.

Loan Proposal

Banks and other lenders use different standards in making lending decisions. A good independent business valuation multiples can make the difference between a loan rejection and approval. In the present tight lending environment, a business borrower needs every advantage he could muster to get this acceptance.

Loan Proposal, SBA

The Small Business Administration (SBA) has specific rules for business valuations that it will take (as detailed at SBA SOP 50-10 5b). If you are applying for an SBA direct or SBA guaranteed loan, then any filed valuation must adhere to SBA rules.

Raising Venture Capital or Independent Investment

Professional venture capitalists as well as independent investors are first and foremost looking for a return on their investment. While investors understand that they are taking a risk, a nicely recorded independent valuation can go a long way toward mitigating the perceived risk, and toward obtaining you the ideal deal for the investment you want.

Estate Planning

For most business owners, the largest single element of the estate is your business that they own. However, many business owners in this circumstance do not understand the worth of the biggest holding. For an assortment of reasons which range from tax planning to strengthening your dreams are correctly carried out without difficulty or conflict, a business valuation is vital for good estate planning.

Estate Settlement

When a moving business is an asset of an estate, a valuation is vital and frequently required by a court, taxing authority, or even both. Unfortunately, disagreements are common in lots of aspects of estate settlement, and the worth of a business that’s in the estate is no exception. It is not unusual that contesting parties will each retain valuation specialists who ascribe substantially different values to the same business. It’s best to hire a valuation expert who has extensive expertise with valuations for estate purposes and in testifying to defend her or his evaluation in court.

Divorce and Additional Legal Purposes

Business valuations are extremely often necessary for divorce settlements and other settlements in which a court or arbitrator is called on to make decisions concerning equity. In these scenarios, it is not unusual that contesting parties will each retain valuation experts who ascribe substantially different values to the same business. In a scenario that might wind up facing a judge or arbitrator, it is best to hire a valuation specialist with experience in courtroom testimony.

Enhance the Value of a Business

There are comparatively simple steps that may boost the value and saleability of several, if not many businesses. This involves assessing the business’ weakness from a buy-sell standpoint and correcting those flaws. Some steps for instance are as easy as placing verbal agreements in writing or procuring a lease renewal option. Other measures take a little more effort but may be well worth that effort. The place to start is with a first valuation that identifies a company’s strengths and weaknesses and the estimated cost, effort, and benefit to mitigate these weaknesses. We’d be delighted to discuss the options of improving your company’s value and salability, before placing it on the market.