Reasons Why You Need a Business Valuation
This video covers some of the many reasons why business valuations are necessary, why you may need a certified business valuation, and how BizWorth can help.
For more about our Certified Business Valuations…
Learn why you may need a certified business valuation and how BizWorth can help. This video covers some of the many reasons why business valuations are necessary. From starting your business to growing, litigating, retiring and selling – there is only one constant – your business is always changing. Whether your business is drafting a buy-sell agreement, seeking an SBA loan, resolving a partner dispute, exploring an acquisition or divestiture, or contemplating gifting shares, BizWorth can provide the certified business valuation you’ll need.
The experts at BizWorth will help you thoroughly research and pinpoint the reliable value of your company with a certified business valuation that meets professional standards and mitigates tax and legal risks associated with buying or selling your business, partner buyouts, buy/sell agreements, share redemptions, SBA loans, or making big changes in your business plans. Visit us: www.BizWorth.com Contact us: www.BizWorth.com/Contact-us/.
Hi, thanks for joining me for this video blog. My name is Sheila Darby with BizWorth. Today we’re going to cover “What is a Business Valuation?” Particularly, what are all the reasons why you may need a business valuation? We get asked a lot from business owners:
- “When is the right time for my business to be valued?”
- “Why do I need a business valuation from a certified third party?”
First, the one thing we’ve learned throughout the many years we’ve been valuating businesses and the different business owners we’ve worked with, one thing is constant, and that is: business is always changing. Your business probably doesn’t look anything like what it looked like a year ago. Now, not all those reasons necessitate getting a third-party valuation, but there are a lot of good reasons why you would need one.
The first is starting up your business or buying a business, particularly if there’s an SBA backed loan involved. The SBA administration requires an independent third-party valuation from a certified professional to provide a valuation for any loans over $250,000. Outside of that, if it’s less than $250,000, it’s always a good idea to have a valuation particularly if you’re using that loan to purchase a business. The banks will require it because it’s mandated by the SBA loan and when they get audited, they’ll have to show proof of that valuation. It also informs whether the valuation loan amount makes sense based on that valuation.
Next, buying. If you’re buying into a business that has other owners. Maybe you’re buying in for a particular number of shares or you want to sell a lot of your shares. You will want to have a buy sell agreement up front, which is considered a will between the owners. What happens if? So, you’ll want to think of all the scenarios where you need a business valuation and how to document how you’re going to conduct that business valuation. At the very minimum, you’ll want to address that there will be a valuation from a certified independent third party. That’s important. You don’t want it from a biased broker who may be incentivized to have a high price thinking that he’s going to sell your business or your shares out on the open market, or price it too low for various reasons. Certified independent appraisers have to maintain a code of ethics when they provide business valuations. In order to adhere to those professional standards, they conduct valuations in a very structured way. So, it’s great to identify in a buy sell agreement that there will be an independent third party appraiser valuing the shares and from there, you can start to outline all the specifics regarding what you’ll need in that valuation. The more you describe in the buy sell agreement, the easier the buying or selling of those shares will be down the road.
Fairness opinions are valuable when you’re getting ready to sell your business and there’s multiple owners and there’s a risk of a dissenting shareholder. A dissenting shareholder is when there’s one particular shareholder you don’t feel will agree with the selling of the company. In that case, there could be legal action and a lawsuit involved. A fairness opinion is very important to avoid lawsuits. If you’re thinking about buying or selling your company and you feel there may be dissenting shareholders, that fairness opinion will be important.
Next, growing your business. You might be at an exciting stage of your business where you’re thinking about having an ESOP (employee stock ownership plan). This ESOP will require that you have an annual valuation of your business for the valuation of the shares and employee benefit plans. Certain ones may require that as well, but ESOPs particularly. If you’re thinking about instituting an ESOP, understand what that is up front, what the annual costs will be and know that you will need an independent third-party valuation. Those are governed by the Department of Labor so you’re going to want to make sure that you have all your ducks in a row. You’re likely already working with an attorney on the ESOP and setting that up in getting the yearly valuation of your company.
Next, expanding your business. This is always an exciting stage. You’re thinking about expanding your business through M&A, shareholder transactions, or capital infusions. If you’re at that point where you’re looking at buying or selling an additional company, acquiring an additional company and folding them into your existing operations, having a capital infusion from shareholders or even debt, the business valuation is critical. You want to make sure you’ve got a solid valuation of your firm and that you’re not selling your shares for less than what they are worth. If you’re expecting too much for your shares, you may find that it’s very hard to have a capital infusion because other people may view your shares differently. So that neutral third-party appraiser is going to be very valuable for you, understanding what the true value of your business is and understanding what all your options are for valuing your business.
Next, is all the legal reasons why you may want your business valued. Everything from bankruptcy and insolvency opinions to partner disputes to dissenting shareholders which goes back to that fairness opinion that we discussed a minute ago to marital dissolutions. I’ll touch on two things here in particular: 1) Partner disputes. We handle a lot of valuations for partner disputes and a recommendation I have is that before the disagreements go too far, it’s always a great idea to have both of the partners come together and say, let’s hire a neutral third party to value these shares. That way the two partners are both the client of the shareholder and the appraiser has equal access to both partners. Both partners feel like they’re being heard, and you’ll get a good valuation. Even if both shareholders go out their own way and get their businesses valued, it’s important to have a certified valuation from a credentialed professional who is adhering to professional standards. 2) Marital Dissolution (divorces). I have seen countless times where one spouse goes out and hires, for example, a broker that buys and sells businesses. That business valuation, I can almost guarantee you, will not adhere to professional standards, would not truly hold up in a court of law and the value will be way off the mark, whether it’s really high or really low. I’ve seen this time and time again, so you want to have a credentialed third-party valuator valuing the business for any legal claims. If you don’t, you run the risk of looking biased in the courtroom or at the negotiating table
Selling your business: you may be at the point in your life where you want to sell the business for a host of reasons. We handle lots of valuations for selling a business. Lots of owners come to us and say, “what is a fair price for my business?” Some owners may or may not have already spoken to a business broker. Some may be wanting to list their business out on a website. There’s lots of great websites where you can list your business depending on the size and the complexity of your business. There’s good and not so good reasons for listing your businesses on independent third-party sites. For some businesses, it works really well. Even if you’re working for a broker, we’ve worked with countless owners ranging from very small restaurants that make a few hundred thousand a year all the way to very large multimillion dollar businesses, up to about $100 million businesses that want to sell their business and have a good idea of what their businesses are worth.
So whether you’re selling your business because it’s the right time or whether you’re thinking about starting to gift your shares to friends and family, you want to have an independent third party valuator. From an estate perspective, if you do not have your shares valued and you do get an audit from the IRS, you run the risk of the IRS saying “that’s not a good valuation” and they contest it. If they do contest it and you feel absolutely certain it’s a fair price, you may go to tax court. I have seen so many of these cases thrown out by the judge if there was a certified professional involved in the valuation of your business, so it’s really a good risk mitigant and good protection for you, as a business owner, to have that valuation from a neutral third party. It gives you confidence when dealing with the IRS.
Certified business valuations in general: 1) you want to protect your investment. You’ve worked an entire lifetime thinking or planning or saving and then running their business. You want to protect your investment by having a certified valuation. 2) You want to be able to negotiate with confidence. When you get a certified valuation, you’re getting a very robust report that speaks about your business and how the valuation was conducted so when you walk into a negotiation, you are armed with valuable information about the valuation of your business and you’re prepared for an in depth conversation. It’s not “I think it’s this” or “I’ve seen most businesses are trading at this multiple”. It makes sense, it’s concrete and you know exactly why your business has been valued what it’s been valued. 3) You want to adapt your business to change. Before you make key decisions in growing, expanding or winding down your business, you want to have a business valuation for peace of mind.
Real quickly, there are some key myths around business valuations, and we’ll have another video blog that discusses these valuations in depth.
- ‘Rules of Thumb” are a quick and accurate way to value your business. It’s not accurate whatsoever. It is quick. A rule of thumb is you hear that businesses in your industry are worth maybe “2x revenues” or “6x see the door”. Even if that is correct and it’s in the general neighborhood, that’s for an average business. The thing about averages is that it’s an average. It’s not the exact multiple that other businesses trade at. They typically are trading at wide ranges of those multiples and your business could be much higher than the average. Don’t settle for the average.
- All business valuations are created equal. I’ve been valuing businesses for over 20 years. Not all business valuations are created equal, so be very careful what you’re getting ready to purchase.
- My CPA can value my business. A majority of CPA’s are not certified business evaluators, so if you go to your CPA to value your business, you’re not getting an individual that has been certified or that adheres to professional standards for business valuations.
- The value of my business is equal to its assets minus liabilities (net worth). There’s lots of things you need to be careful of here. 1) Book value: when you’re looking at your balance sheet, your book value, almost always is not going to be applicable to your business because of the depreciation of those assets. 2) If it is an adjusted net asset value of your business, where your assets and your liabilities are marked to the market value, that still likely is not a good valuation of your business. In some cases, that is better for bankruptcy but be very careful with that.
- “I don’t need a valuation to sell or buy my business.” You’re likely going to overestimate the value of your business and it’s going to be really hard for you to sell, or tragically on the downside, you’re going to underprice your business and sell really quickly but you’ve probably just left it a fair bit of money on the table.
So be informed. You’ve been so informed about what you do and the profession that you’re in with your business, you’re steeped knowledge, you know all about your business. Also, I encourage you to know about the value of your business. Don’t leave hard earned money on the table when it comes time to sell your business.
I hope this video blog was helpful. Please reach out if you have any questions. If you go to our web site, www.BizWorth.com, you can schedule an appointment to meet with me or one of our advisors to talk about your business valuation. Even if you’re not sure it’s the right time for a business valuation, hop on a free consultation and let’s talk through that. We’re always happy to help business owners so feel free to reach out. If you like our content and would like to see more, visit our blog or follow us on Facebook, LinkedIn, and YouTube. Thanks so much.
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