Most clients come to us for business valuation services because of outside requirements. They need an independent appraisal for tax compliance, financial reporting, marital dissolution or estate and gift planning, among other reasons. But even if you don’t have any of these needs, you might want to obtain an appraisal. Why would you want an appraisal?
Knowing the value of your business is essential to intelligent planning. Valuing the company is one of the most fundamental and important challenges faced by business owners as they consider transition plans. To execute a business succession in the most financially lucrative way, while preserving value and future growth prospects, they must know what the business is really worth. If your business were publicly owned, a value would be easy to calculate based on the price of its stock in the market. However, a private business requires a specialized understanding to determine value.
In many cases, owners believe that they have a strong understanding of the value of their business, based on their unique experience over the years with the company. Unfortunately, all too often this personal valuation does not consider certain market conditions and other key factors, and as a result, it does not represent what prospective buyers would be willing to pay. This can be attributed to a variety of factors, including the emotional attachment of an owner who developed the business. Additionally, “rule of thumb” values (e.g. 2 times revenues) provided by business brokers or hearsay about the sale of a similar business may distort the business owner’s perception of the company’s value.
As part of the appraisal process, a valuation analyst must gain an understanding of the many aspects of a business – in effect we strive to become as knowledgeable about your company as a potential buyer would be. You’ll be challenged to answer a number of questions about your company and its operations, and often the questions start with “why.” This can be a process of discovery for both you and the appraiser. We are asking questions to understand the value drivers in your business model (what drives cash flow and creates value), and you are taking a step back from your routine and refocusing your attention on the same topic: what drives value.
Another procedure in the valuation of a business is a comprehensive analysis of historical trends in business operations, along with a comparison of your company’s results to industry trends and benchmarks. Perhaps there’s a reason for your existing costs and capital structure, or perhaps there are other opportunities to explore that can result in greater value. A valuation analyst can bring those topics to light, and illustrate for you the impact of certain hypothetical conditions or changes, all else being equal.
Ultimately, you may choose to implement changes after consulting with an appraiser, or you may keep everything exactly as is for now. Either way, you’re refocused on what drives value in your business. That is one great reason why you should want appraisal services.
By Lynne Bouvea, CPA/ABV/CFF, ASA, CFE