PODCAST: Key Benefits of a Business Valuation

Published on: 06/06/2018 By: Gorfine, Schiller & Gardyn

Many business owners today have a subjective idea of what their business is worth. This is based on competition or other businesses that have sold – and they simply believe their business is worth the same or more.

Often times that is not that case, which is one of the many reasons a business owner should invest in a business valuation. A business valuation allows an owner to not only have a better understanding of what the business is worth, but it provides a progressive outlook on the future of the business.

A common misconception is that a business valuation is only applicable in the mergers and acquisitions (M&A) space. However, there are many other applications, uses, or needs for a valuation. Depending on the type or the reason for the valuation, a business valuation can serve as a valuable tool for a business owner, which will function as a proxy for a prospectus.

For instance, the premise of the valuation could be due to a going concern, or the business could be close to requiring liquidation. The reason for a valuation could be a result of estate planning, litigation, preparing an estate valuation for an individual that has passed away, or gifting.

Valuations are used as a necessary asset when dealing with divorce. A business may be marital property, therefore, a valuation would be required if the husband or wife owned a business.

Damages or loss wages benefit from a valuation. If there is a flood or electrical loss, it is necessary to determine the loss of business.

How do you go about beginning the process?

Significant data is collected to properly analyze any risk involved with the business. GSG valuators ask for five years of financials. Other financial data such as leases, notes receivable, notes payable, aged accounts receivable, aged accounts payable, and income tax returns are all closely analyzed.

An important function of a business valuation is the measurement of risk. It is helpful to review a history of related party transactions as well as any reports or appraisals. Legal documentation, such as articles of incorporation or organization along with bylaws or operating agreements, need to be examined to determine how an individual’s ownership may be retired or sold. GSG valuators will research the history of the company, copies of collateral material, and information provided on the website, all for a better understanding of how the company evolved over time.

It’s important to note that any subsidiaries will need to be valued first and then rolled-up into the overall financial statements. In this manner, they will ultimately contribute to the value of a control or holding company.

Many companies today have pension plans and profit sharing. It’s important for a valuator to understand how owners are paying high wages to themselves, and if owners as a group want to sell their business, their salaries must be rested or adjusted to market salaries.

A valuation can be considered an arduous task, but the results are imperative for owners to truly know what a business is worth.

If you would like to learn more about a business valuation, please contact our team today.