Business Valuations as an Operational Tool

In a complex and volatile economic climate such as this, it’s important to use every tool at your disposal to ensure your business stays on top of its game — especially when seeking financing to support ongoing operations or future expansion.

From this perspective, a professional business valuation can be invaluable — both in obtaining the funding you need and in helping you analyze your business’s current challenges, opportunities and expected cash flow.

As a business owner, you never know what unexpected challenges the future may hold. For example, if you have partners, one of them might suddenly decide to leave the company — perhaps to retire early or cash out for other reasons, such as medical or caregiving concerns. In such a situation, you’re going to need to an estimate of the business’s value.

Support a Buy-Sell Agreement

For businesses with more than one owner, it’s important to draft and maintain a buy-sell agreement. This contract among a business’s owners sets guidelines for the transfer of their interests. The agreement gives the remaining owners, or the business itself, the right to buy an exiting owner’s interest if a triggering event takes place. In addition to an owner’s voluntary desire to leave the company, divorce, disability, retirement, death, or loss of a professional license or certification are all commonly named triggering events.

So, what does all this have to do with a business valuation? Simply that a valuation of your company will play a key role in the creation and maintenance of a buy-sell agreement. In fact, a well-crafted agreement should address the preferred valuation method, the appropriate standard of value, the effective valuation date, and the applicability of valuation discounts and premiums.

Build a Better Deal

Although a business valuation can provide operational insights, there’s no getting around the fact that it most often comes into play during a transfer of business ownership interests. Even if you aren’t sure you want to buy, sell or gift a business interest, a valuation may help you get a better sense of when the time will be right to do so.

Most valuation advisors subscribe to transaction databases that report recent selling prices of similar private businesses. The information gleaned from the valuation, combined with input from other professionals, can help you come up with a creative deal structure — one that minimizes taxes, provides you with income to fund retirement and meets other objectives.

Make a Sound Decision

In so many ways, a professional valuation can often more than repay its cost — whether you use it in due diligence during a sale or merger, for estate planning purposes, or just to gain a better sense of your business’s operational strengths and weaknesses. Your CPA can help you decide whether you should undertake a valuation now and, if so, provide assistance during the process.