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What you need to know about business valuations

November 24, 2014


Health is important. You visit the doctor at least once each year, and that same approach should translate into your business. And how do you gauge the financial health of your venture? The answer is through a business valuation.

A business valuation is an extremely important asset for any owner. Should you be looking to sell, transition the organization into the control of another person, buy another business or pursue a different option, understanding the financial details will ensure you make the right decision.

The biggest problem you can face by skipping a business valuation is selling for lower than what your venture is actually worth. Naturally, this can create problems across the board, but with a valuation completed you’ll be able to keep moving forward and minimize the potential for roadblocks along the way.

Experience benefits valuations
Pairing with the right valuators is important at this time. At Clark Schaefer Hackett, we are on the cutting edge of business valuation trends and issues. As a result, we know what factors will impact this segment and how that will translate into your company. Our experience and dedicated team will work with you to gain an accurate image of your financial health.

New developments impact the valuation community throughout the year, and staying up-to-date with these issues and other factors will result in a more accurate, comprehensive valuation.

To help you achieve your professional goals, here is what you need to know about business valuations:

Prepare for reality of business valuation
The financial health of your venture is a very personal subject. Your professional valuator will delve into the intimate details of your business, and naturally your opinions on the matter can come into play.

This brings up one of the biggest misconceptions about business valuations. Many owners believe that their firms are worth a certain amount. Often, this figure is inflated due to personal feelings, sentimentality or other aspects. From a valuation standpoint, the important elements are the finances. As a result, there can be a gap between the actual financial value and the intrinsic value.

Prior to moving ahead with a valuation, you must prepare yourself for the reality of the numbers. In many cases, there isn’t a significant difference between the actual value and your expectations, but understanding how a valuator will scrutinize the venture can prevent a misunderstanding.

The reasons for valuations
You may also be wondering why a business valuation is needed in the first place. Without a valuation, you might not have an accurate representation of the worth of your venture. This can create problems throughout the life of your ownership, plus it might also lead to financial penalties or other monetary problems down the line.

There are several main reasons why a valuation is important, including:

  1. Understand your business
  2. Streamline transactions
  3. Avoid penalties

1. Gain a better understanding
One of the broad reasons behind a business valuation is education. As an owner, you need to know what is going on both in your organization, your industry and the economy as a whole. A valuation can shed light on the current financial situation of your venture, plus it will bring in additional information about the fiscal health of neighboring firms. With a valuation complete, you’ll gain a more comprehensive understanding of how your company relates to others in your industry.

2. A streamlined, smooth transaction process
A business valuation is incredibly vital should you want to sell your venture, transfer control to another person or family member or alter your current tax situation. These transactions will all be much more complicated should you forgo a valuation. Instead, have one completed to streamline this process.

3. Avoid tax penalties
An accurate value of your business is crucial for your tax documents, financial plan and other compliance requirements. If you don’t have a recent valuation completed, you might realize that the numbers don’t add up. The result may be tax penalties or other errors that can eat into your budget.

What is analyzed during a valuation?
Next on your list of questions about the business valuation process may be the elements analyzed at this time. From a valuation standpoint, there are a few key details that are looked at closely.

For starters, valuators will check the background and financial history of your company. This helps them determine an accurate picture of the venture and its current place in the industry. Next, valuators will dig into the current competitors and the marketplace. These factors will impact the final value, and it helps to know the strengths and weaknesses of your firm, your competitors and the industry as a whole.

Once this is complete, professionals will delve into your current financial records. All the details are looked at here, including publicly traded stocks, assets, income, cash flow and balance sheets. It helps to compare your business to similar ventures to determine value.

A business valuation can take the form of several approaches, including:

1. Asset approach
There is the asset approach, which is when valuators use the market value of your assets and liabilities to determine your value. Taking these elements into consideration, your firm is compared to other similar businesses. Such a strategy is often ideal for companies that have substantial investments or other assets.

2. Income approach
Next is the income approach. This method will determine value by looking at potential future income. Valuators will analyze historical income and cash flows to predict future income. This strategy depends heavily on accurate records of your past financial data.

3. Market approach
The third option is the market approach. This direction allows valuators to determine value by comparing your company against similar firms. Professionals will use both public company multiples or private sales transactions for private firms to move forward. This approach is beneficial for publicly traded companies or other organizations that have products and services that are easily compared to others.

Plan ahead of your next business valuation
A business valuation shouldn’t be a last-minute decision. It is best to contact a valuator every several years, because the financial factors that determined your previous value may not be as up-to-date as possible. When a sale or another type of transaction is likely, the sooner a valuation is completed, the faster that deal can move along.

At its core, a valuation is simply an estimate that a buyer is willing to spend today. That is why this process is so dependent on the current market and other fluctuations. Without the right advisor in place, outside factors may go unnoticed and have a negative impact on the valuation. Working with the right people can streamline the process and ensure everything goes as smoothly as possible.

At Clark Schaefer Hackett, we are aware of the current market trends and other elements that will impact the value of your business. Once contacted, we will work with you to get the most accurate data possible during this time. As a result, your valuation will be precise.

Preparation is key during a business valuation. Our experts will provide you the needed resources to simplify the process. To get started, we will open a dialog with your company so you will be ready for an on-site visit. Then, we will look over the financial history of your venture and compare it with other firms in the marketplace. Once your strengths and weaknesses are considered, we can move forward with a sound valuation of your company.

© 2014

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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