What is a Business Valuation?

A business valuation is a formal process used to determine the overall value of a business, including its fair market value. This evaluation is conducted for various purposes, such as preparing for a future sale, establishing the value for ownership or partnerships, or meeting taxation requirements. The valuation process typically considers factors like financial performance, market conditions, assets, liabilities, and future growth potential.

Why is it Important to Have a Business Valuation?

Having a business valuation is crucial for several reasons. The most common is preparing for a future sale or transition out of the company. A valuation determines the sale price and gives the owner a realistic understanding of the expected proceeds, helping them decide whether it is the right time to sell or transfer ownership. Additionally, the Internal Revenue Service (IRS) requires a fair market value when selling or gifting shares of a business for tax purposes. A valuation also serves as a benchmark for measuring future growth and identifying areas for improvement. Once the valuation is complete, working with an experienced accounting firm can help increase the business's value over time.

How to Value a Business | What are Intangible Assets

How to Value a Business

A valuation is conducted by a third-party provider with experience in business valuations. The process determines the current value using objective measures. It includes reviewing the future earnings potential, the market value of the assets, the capital structure, and an analysis of the company's management. The value factors will include projecting cash flows and expected growth, along with reviewing any perceived risks.

Three common valuation methods may be used alone or in combination. Your valuation expert determines the method used.

Asset-based approach
Income-based approach
Market approach

Business valuations are the baseline in determining the value of your company, so this is not the time to shop by price only. Use a certified valuation expert who has experience in your industry.

What Are Intangible Assets?

Intangible assets are not physical but have value for your business. Some of your intangible assets may be worth more than your physical (tangible) assets.

Intangible assets may include:

Workforce
Reputation
Trademarks
Patents
Licensing Agreements
Domain Names

Intellectual Property
Brand Recognition
Patents
Customer Base
Relationships
Goodwill

Where do you Record Intangible Assets?

As part of your financial statements, there is a balance sheet that records your business's assets.

First, list the tangible assets and then list the intangible assets. If your intangible asset has a finite life, such as a patent, then you can amortize that intangible asset to help offset your tax liabilities. Intangible assets have significant benefits for your business as they can be used to rebuild if your tangible assets are destroyed. Intangible assets can also affect your reputation and, in turn help your business grow or cause setbacks.

With social media's speed, your brand can easily be damaged by unhappy customers or poor product performance. Your reputation would suffer and cause a loss of sales. While intangible assets do not have a cash value, they are critical and should be monitored and nurtured accordingly.

Services Offered: How SVA Can Help

Business professionals need easy access to information to make timely decisions. SVA has what you need, when you need it. Choose a topic below or just contact us directly. Our expertise is ready anytime you need it.

There are several valuation methodologies that can be used to determine business value. The valuation is a critical component of the exit process as it is the primary driver for determining how much you will receive for your business.

SVA’s Certified Valuation Analysts have extensive experience to help you determine your business value. When the time comes to exit, we can assist with a sale offer that aligns with the value of your business.

BIZ TIP: Why Valuations Are an Important Tool Now

For gift and estate tax purposes, the fair market value of the property transferred to another party is measured on the date of the transfer based on the “willing-buyer, willing-seller” test.

Assets without a readily ascertainable value must have a value determined using methods recognized by taxing authorities and courts to validate the price.

SVA assists clients through all phases of the valuation process including audit and tax court proceedings. We work directly with the client’s attorneys, accountants, and estate planning professionals to resolve issues that arise, including valuation discounts and premiums, pass-through entity and built-in gains tax calculations, as well as issues related to Family Limited Partnerships (FLPs).

BIZ TIP: Minimize Tax Implications with Estate and Tax Planning

If you are looking to sell to a third party, you will need to follow the four phases of a successful merger. These include Pre-Acquisition Planning, Due Diligence, Deal Negotiation, and Post-Acquisition Strategy.

SVA can help you in all phases of the process and our certified valuation experts can advise you in making the transaction financially feasible.

Understanding your break-even point is key to making confident business decisions. We can help you calculate how much you need to sell—daily, weekly, monthly, or annually—to cover your costs. You can use this analysis to better understand how to generate profits in your business. Whether you’re launching a new product or simply reevaluating operations, our break-even analysis provides a granular look at the sales targets needed to keep your business on track.

If the marital estate includes an ownership of a closely held business, the value of the business needs to be determined for marital dissolution purposes. The definition and standard of value vary from state to state as does the treatment of goodwill.

SVA has experience that allows us to work with your local attorney on any state-specific valuation issues that may arise. In addition, SVA’s valuation experts are trained and experienced in handling the unique financial challenges presented in collaborative divorce cases.

Whether the company has developed a new idea or is interested in acquiring one, a careful estimate of value can be critical to future decisions. These include licensing, transfer or sale, securing financing, and tax compliance of in-process research and development.

SVA helps clients determine the value of their intellectual property and provide an estimate of the useful life and market royalty rates.

ProfitCents is a powerful tool we use to generate projections and perform various “what-if” scenarios. Whether you're budgeting for growth, preparing projections for a loan, or acquiring a business, we use ProfitCents to generate detailed financial forecasts as well as benchmark your company’s performance against industry peers.

Resources

Company Valuations - Understanding Valuation Methods

This eGuide will help you understand the types of valuation methods, as well as understanding the marketability of your business.

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sva-certified-public-accountants-reducing-risk-business-acquisition-advisory-ebook-1

Reducing Risk: Business Acquisition Advisory eGuide

Having a proper M&A strategy is an important factor in reducing your exposure to risk. Download this eGuide to establish yours.

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Using Value Drivers to Increase Business Value

In this eGuide, you will find ways to understand and implement key value drivers for your business. Start now to determine your company’s overall health.

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Exit Planning: The Official Guide

The exit planning process has many moving parts. This eguide will provide the information you need to prepare for the successful exit of your business.

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