An Accurate Business Valuation is Critical when Exiting Business Ownership.
An accurate business valuation is critical when exiting business ownership and preparing for sale.
Valuing Your Company Correctly
Nowadays, the internet provides access to countless resources. Some people interested in appraising the value of their home or business may turn to their trusted search engine to find the answer.
Many online services, unlike professional business valuation services, rely on formulas and calculations to offer quick valuations — some done in under thirty minutes. To conduct the valuation, these platforms rely on the individual user to provide the required metrics regarding the entity’s assets, industry, and growth prospects.
Problems with Free Online Business Valuation
The problem with this approach, however, is that many individuals tend to be biased and overestimate their own assets’ worth. That’s because they may have an unrealistic idea of how much their company is worth. This often results in an overinflated valuation from sources that claim to provide accurate assessments.
Moreover, many of these applications ask for financial information, like profits and losses. However, individuals filling out the form may fail to answer the questions correctly.
This often occurs when asked about something technical — like estimating the earnings adjustments or deriving a profits multiplier for their company. Inputting values based on pure estimates or guesses will result in an inaccurate appraisal that requires further clarification, unlike a fully documented professional valuation.
Inaccurate Automated Business Valuations
As a result, these automated valuations offer inaccurate values that fail to provide impartiality and do not consider the business’s historical financial data in determining a business’s actual value.
Suppose you, as a business owner, are merely curious about your firm’s value for internal purposes and do not plan to make decisions based on the value gauged. In that case, an online valuation may be sufficient. However, if you plan to establish an exit strategy, estate planning, or profit strategizing, it might be worthwhile to seek a professional valuation of the enterprise.
Why a Certified Business Valuation
A certified business valuation by accredited business valuation experts and a Business Appraisal FL|GA|HI team member takes strategic and in-depth analysis to determine an accurate estimation of a company’s worth. The process is complex and involves various considerations, calculations, and studies.
Although working with a valuation company will take several weeks, the comprehensive valuation report produced will make the wait worthwhile.
This is because appraising a company is an art — not a science — with profound implications.
Here is another article on the 7 Benefits of a Certified Valuation.
Moreover, the appraisals reached by a BA F|G appraiser are independent and unbiased. For the professional appraiser to be able to conduct their research, a certain amount of data, paperwork, and financial information will need to be provided.
Documents Needed for a Business Valuation include the following:
Your current capital structure
Your financial statements over the last three years
Tax returns from the last three years
The current year-to-date financial statements
The profit and loss summaries from the last three years (quarterly if available)
You need an accurate valuation as a business owner for various reasons.
For example, you may need a legitimate appraisal to obtain a business loan. This is often the case if the lender is a traditional bank. You may also seek a valuation to establish partnership agreements, settle ownership disputes, or bring in a third party. A business appraisal may even be needed if you plan to gift a portion or more of your business for estate planning purposes.
But such valuations may not always be ordered by the owner. An entity, such as a commercial lender, legal practitioner, tax official, or court, may require an independent business appraisal for its own purposes.
Here is our short guide on choosing a business valuation company.
Standard Valuation Methodologies
Few things are more critical to planning than understanding the value of a business and its assets. Regardless of the reason for obtaining the valuation, there are a few standard approaches that a certified appraiser may use to determine the valuation of a company. These methods include the market approach, the income approach, and the asset approach.
Market Approach – With this approach, the evaluator will consider similar businesses’ selling prices and use data to estimate what your company is worth. Competition is the driving force behind this approach to establishing your company’s value. Thus, this technique is like that used in a home’s value appraisal.
Income Approach – Depending on the specific formula used, the current cash flow would be capitalized, discounted, or multiplied to help determine the future financial value of the company. At its core, the method considers the expected economic benefit and level of risk that would come from an investment in the business.
Asset Approach – As part of this method, the appraiser sums up all the tangible parts that comprise the business. As a result, all equipment, stock, and supplies are considered separately before being added together. This total dollar amount becomes part of the business’s overall value to potential buyers or shareholders.
Each approach, although unique, will provide you with an estimate of the company’s worth from a different perspective.
Certified Valuation Conclusion:
Whether you need financing or succession planning, a precise business valuation is crucial. Acquire comprehensive economic knowledge of your business now to make informed decisions in the future.