SR Glossary: Business Valuation
Every year, thousands of small businesses are bought / sold, and as a small business owner, maybe you have wondered “How much is my business worth? Can I sell it for $xxx,xxx? When is the right time to sell my business and retire?”
There are many unofficial ways to value a business; you could compare the sale price of a similar business, multiply revenue or sales data to arrive at a fair price, or pick a number based on nothing more than how much you hope to receive. Although some of these methods may get you close to the asking price you want, the actual market for your business may dictate an entirely different amount. Much like buying a home, everybody has an opinion of what the house is worth; however, only a qualified real estate appraiser can justify a purchase price.
Like appraising a home, the best way to get an accurate estimate of your business’ value is thru a business valuation. A business valuation establishes a value of a partial or entire interest in a closely-held business or professional practice. The factors taken into account are both quantitative and qualitative, because both the tangible and intangible factors related to the business are being valued.
Determining a value of your business can be done at different times in your business’ life and for different reasons. One instance when a business valuation should be done is during your estate planning process, long before you plan to retire. Having a base knowledge of what your business is worth can help you determine what you can do with it in the end. (ie. sell a piece, gift pieces to relatives, or sell the whole thing). Having knowledge of what your business is worth can also help you figure out ways to increase its value along the way, thereby increasing your nest egg during retirement. Getting a business valuation should be the first step in any estate plan.
Business valuations can also be used for:
- Purchase or sale of closely-held businesses or interests
- Gift tax and estate tax valuations
- Analysis and advice concerning pending offers to purchase
- New partner buy-in (i.e. physician buying-in to medical practice)
- Court appointed valuations in disputes
- Minority shareholder disputes in litigation
- Divorce (equitable distribution)
- Business damage asset determination
- Solvency analysis and fraudulent conveyance
- Reasonable officer compensation determination in disputes with the Internal Revenue Service
At ShindelRock, we have several CPA’s who have obtained the additional credentials of CVA (Certified Valuation Analyst), allowing them to prepare business valuations. If you would like to know how much your business is worth, or need a business valuation for one of the other uses listed, please contact us.