Purposes of a Business Valuation

In the last issue (#52), we highlighted the need for Contingency Planning – Facing Your Own Mortality. In this issue we will discuss the Purposes of a Business Valuation.

"Everything has its beauty, but not everyone sees it." Confucius

Purposes of a Business Valuation

There are four primary purposes for business valuations, and multiple reasons for each purpose, that may prompt owners to obtain a business valuation.

The four primary purposes are driven by:
1) Planning
2) Taxation
3) Transactions
4) Disputes.
The reasons for business valuations are categorized below under their potential purposes (many reasons have multiple potential purposes):

Planning/Taxation/Transaction Purposes

  • Exit strategy planning
  • Succession planning
  • Tax planning
  • Estate valuation/planning
  • Gift valuation/planning
  • Family business ownership transfer
  • Selling a business
  • Buying a business
  • Raising capital for equity capital injection
  • Corporate reorganization for growth
  • Merger
  • Establishing an ESOP
  • Change in corporate entity for tax purposes- (for more information read this article: Issue #65 – Achieving a Partial C-Corporation Tax Benefit)
  • Establishing the value of “personal goodwill” for tax purposes in a business sale
  • Buy/sell agreements

Planning/Taxation Purposes

  • Personal financial planning
  • Life insurance purposes

Transaction Purposes

  • SBA-required business loan valuations for most business acquisition financing
  • Lender’s requirement to obtain business financing for various purposes

Dispute Purposes

  • Partnership disputes
  • Shareholder disputes
  • Family disputes (including divorce)
  • Litigation support
  • IRS dispute settlements

Internal vs. External Use

Further, the purpose/reason for the business valuation can be for internal use or for external use.  If the business valuation is for internal use such as exit strategy planning, an informal valuation, such as those provided by qualified business brokers or merger and acquisition intermediaries may suffice.  However, when the business valuation is required for external purposes such as obtaining a SBA loan, a formal business valuation from a professional business appraiser is required.

Many business brokers offer no-charge no-obligation evaluations of small businesses

They can:

  • Provide a broker opinion of value
  • Help identify obstacles to a successful sale of your business
  • Help identify opportunities for improvement to increase the value of your business.

That is a great way to start planning for a successful and profitable exit from your business.

Why do business brokers provide no-charge, no-obligation evaluations?  They are interested in developing a long-term relationship so when the timing is right for you to sell the business, you will remember and trust them with that responsibility.

"A good problem statement often includes: (a) what is known, (b) what is unknown, and (c) what is sought." Edward Hodnett

Overcome the Power of Inertia

Overcome the Power of Inertia and call a business broker for a free consultation. Many brokers offer no-charge, no-obligation evaluations of small businesses. They can provide a broker opinion of value and help you identify obstacles to a successful sale as well as opportunities for improvement to increase the value of your business. That is a great way to start planning for a successful and profitable exit from your business.