A business valuation is a formal process of determining the overall value, as well as the fair market value of your business. There are many reasons you may need a business valuation, including preparing for a future sale, establishing value for owners/partnerships, and taxation.
The most obvious reason for a business valuation is preparing for a future sale or transition out of the company. The valuation will help determine the sale price and provide the owner with a realistic idea of what proceeds they can expect as they decide whether this is the right time to sell or transfer ownership.
For tax purposes, the Internal Revenue Service (IRS) requires a fair market value when selling or gifting shares of a company. Understanding the current value is also the benchmark for determining future growth. Once you have a valuation, work with an experienced accounting firm to develop ways to increase the value.
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.
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.
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:
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.
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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. According to BEI's Business Owner Survey Report, "60% of owners say they used informal valuation methods to determine the value of their business. This indicates that most business owners are still basing their projections on shaky grounds." 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.
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).
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.
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.
This eGuide will help you understand the types of valuation methods, as well as understanding the marketability of your business.
Having a proper M&A strategy is an important factor in reducing your exposure to risk. Download this eGuide to establish yours.
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.