Businesses change ownership for a variety of reasons. Whether they’re merged, divided among partners, sold, or given away, ownership of even a stable business is subject to change at some time. When this happens, involved parties must have an accurate idea of the value of the company’s assets. This makes business valuation an important part of the transfer of ownership. Below are several things to remember when seeking a business valuation or learning how to sell your business.
Its Purpose
A company’s assets may change hands for various reasons that can affect how the company is valued. For instance, valuations for estate and gift tax returns are determined differently than those for divorces and shareholder disputes.
The Date of Valuation
A valuation’s date can significantly affect the business’ value. For example, a most business’ values would likely have diminished in 2008-2009 because of the devastating effects of the crash of the Great Recession.
The Value Standard
Valuations are put into three different categories: fair value, fair market value, and strategic or investment value, as defined in the sections below.
- Fair value is typically used in divorces and stockholder disputes; it excludes discounts for lack of control or marketability.
- Fair market value is the price for which a property would sell between a well-informed and willing buyer and seller.
- Investment or strategic value is the value to a certain investor based on their expectations and requirements. It’s commonly used in mergers and acquisitions when a business buyer plans to change positions or product lines.
Before selling a business, a business’ current owner should consider the category into which the valuation falls.
The Value Premise
This is an assumption of the circumstances that may apply to the valuation. There are four categories to consider.
- Book value, which is the total value of the assets minus the company’s liabilities
- Going concern, which is the business’ value under the assumption that operations will continue
- Liquidation, or the value of the business if it were to be ended and all assets divested
- Replacement value, or the cost of replacing all the company’s assets with newer versions
For nearly all of our customers, who are normally selling a business that will continue on with the next buyer, the going concern methodology will be the one we use. When selling or buying a business, it’s important to have accurate financial statements during the valuation phase and beyond. With good financials, an owner can form a successful exit strategy and a new owner can assume control being fully informed. Visit the website for more information on how to sell a business.