Article: Business Valuations: A Timely Prescription
Business
Valuation: A Timely Prescription By Joe Thornton, CPA, PFS, CFP™, CVA
Do
you know what your business is worth?
If
things are going well and it’s generating a steady
income, you may not care. After all, what matters isn’t
the value of the business, but its profitability, right?
Well,
it’s not entirely wrong. Knowing the value of your
business won’t improve your bottom line, and it won’t
have a direct effect on customer or client satisfaction.
Still, there are many good reasons to have a valuation
performed periodically.
Certain
situations will require a valuation. If your business
is being acquired or if you are acquiring another business,
a valuation performed by a certified valuator can help
set a fair price. The same applies if you intend to take
your business public. In some instances a valuation will
be required in order to obtain a loan. Also, if the ownership
situation is changing – meaning new owners are being
admitted, additional members of the management group are
taking an interest in the company, or if an ESOP is planned,
the value of the business should be determined.
Valuations
are also required in many situations that people are usually
not expecting. If one of the owners of a business decides
to leave for any reason, a valuation will be required
to determine their share. If one of the owners dies, a
valuation will help determine the value of his or her
estate. If an owner gets a divorce, a valuation will help
determine the division of assets.
These
last three issues bring up what may be the most important
reason to have a valuation performed proactively before
it is required: planning.
No
one can predict or fully prepare for unforeseen circumstances
such as those listed above, but a periodic evaluation
of a business’s worth can allow owners to protect
their share. If the value of the business is known, life
insurance and investments can insure that the financial
repercussions will be kept to a minimum in the event of
an owner’s death or departure, or if one of the owners
goes through a messy divorce.
But
protecting the business isn’t the only reason to
have a periodic valuation performed. A valuation can be
a valuable management tool, providing useful benchmarks
and details on the business’s strengths and weaknesses
that can be used in strategic planning, process evaluation,
and in making various management decisions.
Valuation
is both an art and a science. It is an art to value the
intangible goodwill portion of the business and a science
to value the tangible portion. Both require experienced
application of generally accepted valuation procedures.
A qualified valuator, such as those employed at Mitchell,
Wiggins & Company LLP, is in the best position to
provide a fair and accurate valuation.
The
bottom line is this: It can never hurt to have an idea
of what your business is worth. |