There are several reasons for why a business owner would need to determine the value of their business. In addition to determining what a potential buyer might pay for a business – there are many other circumstances in which a business owner may need a valuation. Common reasons include: death or divorce of a business owner; the addition or removal of an owner from the business; succession planning for the purpose of passing the business to a new set of owners, and planning for an outright sale to unrelated buyers. Valuations are an important part of implementing strategic business decisions, which can include mergers or acquisitions, resolving business disputes among owners, performing due diligence in determining whether or not to buy or sell a business in the first place, valuing employee stock ownership plans (ESOP’s), or providing documentation for bank loans.

When it comes to determining the value of a business, many business owners believe that getting to the right number involves simply taking a number from a set of financial statements or an income tax return and applying some sort of factor to it. However, this can leave owners at risk of valuing their business either too low or too high, undermining their goals for whatever transaction they are planning for.

A true business valuation includes collecting information “behind the numbers” and determining the most appropriate method to use for the particular business being valued. Some examples of factors that need to be taken into account include (but are not limited to) a review of current management, a forecast of economic trends, and a look at intangibles, such as goodwill. Many CPA’s do not provide this type of service; it requires special training and experience. These determinations and methods are in the skill set of a Certified Valuation Analyst (CVA), which is the designation offered by the National Association of Certified Valuators and Analysts (NACVA). Often, the process of collecting the necessary information, and working with the CPA/Valuator leads to ideas and possibilities to improve the performance, and the value of the business itself.

A business valuation is appropriate for many sizes and types of businesses, from small family owned shops to large corporations with operations all over the world. Larger valuations can become very complex, such as when a parent company wants to sell a subsidiary company, or when an owner has multiple companies that require separate reporting for each company. No matter the size and scope of the project, it is up to the expertise of a CVA to ensure a fair and useful valuation. 

It is in the best interest of a business owner to know the true worth of his or her most valuable asset, and to understand how to use that information to make decisions. A business valuation is not only useful for finding that number value but can also be used as a starting point for developing a strategic plan for their company’s future.