When It's Time To Value Your Business

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When It’s Time To Value Your Business

 

Edward L. Fixen, President

BusinessQuest

 

Whether it’s for exit planning purposes, qualifying for an SBA loan, finding investors, executing a buy/sell agreement, establishing an ESOP, estate planning or selling, it is highly likely that you will need a business valuation at some point during the life of your business.  Understanding the value of a business and the key drivers behind that value is certainly one of the more intriguing and important issues a business owner should address in favorable or tough economic times.  This article gives a brief overview of the different types and purposes of valuations available to a business owner.

 

A business valuation is a powerful tool that provides an estimate of fair market value and gives insights to the factors that most directly influence the value of the business.  Many factors such as revenue, stability of earnings, financial trends, depth of management, key employees, customer base, customer contracts, industry outlook, terms of sale, etc. are taken into consideration in a business valuation.  For detailed discussion regarding business valuation calculation methods you may review “How Much Is My Business Worth?” Parts 1 & 2 in our Articles Archive.

 

As part of an exit plan, a valuation can be used to assist in the formulation of business strategies to increase the value of the business.  The SBA recently revised their lending guidelines to require a business appraisal for loans over $350,000 with the added condition that the appraiser be accredited by a recognized organization such as the Institute of Business Appraisers. 

 

Fortunately, the options for business valuations range from affordable oral valuations for internal planning purposes to more expensive, detailed report business appraisals for estate planning, partnership/shareholder disputes, litigation, etc.  That is why it is critical that a business valuation be tailored to the specific purpose and ultimate use intended.  For example, a valuation for exit planning or a business sale should be thorough and accurate but does not require the same standard of supporting documentation as a business appraisal prepared for litigation, estate planning, etc.

 

Business valuation options have many different names but the following table summarizes the four basic categories of business valuations.

 

Item	Business Valuation Options
	Oral Report Valuation	Opinion of Value Or Calculation Report	Summary Report Business Valuation	Detailed/Comprehensive Report Business Valuation
Description	No Written Report	Limited Analysis, Short Written Report	Site Visit & Interviews, Multiple Valuation Methods, Summary Report	Site Visit & Interviews, Multiple Valuation Methods, Extensive Written Report with Certification
Examples of Potential Use/Purpose	Affordable Method  to Estimate Value for Internal Business Planning	Small Business Sale or Acquisition, Small Business Bankruptcy	SBA Loans, Business Acquisition, Medium/Large Business Bankruptcy, Exit Planning, Buy/Sell Agreements	Estate Planning, ESOPs, Partner Disputes, Divorce, Litigation
Suggested Qualifications	Certified Business Broker, Business CPA, Certified Business Appraiser*	Certified Business Broker, Business CPA, Certified Business Appraiser*	Certified Business Appraiser*	Certified Business Appraiser*

 

* - Certified Business Appraiser designations include Certified Business Appraiser (CBA), Certified Valuation Analyst (CVA), CPA Accredited in Business Valuation (CPA/ABV) and Accredited Senior Appraiser (ASA).

 

The cost for a valuation will range from $750 on the low side for an oral valuation to $25,000 plus on the high side for a well documented business appraisal used in litigation cases.  The cost for a calculation report or summary business valuation will fall between these two ends of the spectrum.

 

As the chart above implies, the qualifications of the person preparing the valuation is as important as the purpose.  The valuation professional should be independent, regularly perform valuations and have credentials commensurate with the intended use and purpose.

 

Author: Mr. Fixen is a Certified Business Broker and the President of BusinessQuest, a business valuation, exit planning and brokerage firm serving Southern California.