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Why Do A Business Valuation?

Mar 01, 2010

By Leonard Holler, Wyoming Entrepreneur – Small Business Development Center Regional Director and Certified Valuation Analyst.

 

Gil in Cody, Wyoming asks, “Why would a small business owner, like myself, need a valuation done? I am not trying to sell my business.”


At first it might seem that the only reason for a business valuation is for no more than the casual interest of a business owner. The fact is that there are as many kinds and varieties of values as there are reasons for valuing a business.

 

In some recent articles in Inc. magazine and Entrepreneur magazine, they conclude that business valuations are important for businesses of ANY size – and not just when a business is being bought or sold. Inc. magazine stated – “A business's success is ultimately measured by a business's value…. Knowing your net worth as a private business owner provides a useful snapshot of where your company stands, what options it has, and how it can improve in the long term." In short, business valuations are a significant planning tool for small and large businesses alike.

 

They are used in various business situations and can be impacted by any number of circumstances. Some of the common uses of business valuations include –

  • Determining the price to buy, sell or merge a business.

  • A reality check of your business performance.

  • A tool for developing employee and business improvement goals.

  • Setting prices for adding new shareholders, new stock purchases or buying back shares from existing shareholders.

  • Helping determine the business owner’s personal net worth for estate planning, insurance requirements and financial planning.

  • Obtaining or even maintaining financing options.

  • Employee stock ownership plans (valuations are required by ERISA).

  • Stock bonuses or other compensation incentive plans.

  • Going public and IPO research.

  • Feasibility of management or leveraged buyouts.

  • Divorce proceedings of owners and shareholders.

  • Various litigation support documentation.

  • Mediation and arbitration of disputes between shareholders or business partners.

  • Value of business spin-offs.

  • Bankruptcy, business liquidation or reorganization decisions.

  • Exit strategy planning and development.

  • Conducting due diligence on mergers or acquisitions.

 

Business owners also need to periodically evaluate their own performance. Financial ratio analysis and business valuations can help them objectively determine their management effectiveness. This is not the only measurement of how well a business is operating, but can give you reason to ask more questions about how you operate your business.



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Category: Accounting

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