What You Need to Know About Business Valuations

By Jacob Orosz

As a business owner, one of the most important questions you need to answer is: What is my business worth? However, that question is not necessarily one that you can or should answer by yourself. When contemplating your exit options, you should consider receiving the advice of a professional.

At this point, you may find yourself asking a number of questions, such as: What is a valuation? What are the different types of business appraisals? How much does a business valuation cost? Do I really need a valuation for my business? What is the process of determining the value of my business?

This article addresses these questions, as well as others, and guides you through the critical decisions you need to make when planning to sell your business.

What is a business valuation?

A business valuation is a process used to determine how much a business is worth. The end result can range from a verbal opinion of value to a short written report that estimates the value of your business to highly complex formal reports that exceed 200 pages. These types of appraisals range in price and can cost anywhere from nothing to tens of thousands of dollars.

What is the purpose of a business valuation?

Business valuations are used for many purposes. The value of a business is often required in divorce proceedings, tax planning, bankruptcy proceedings, litigation, buy-sell agreements and strategic planning. An appraisal may also be needed when arranging financing and assessing economic damages for litigation.

Most appraisals are performed for legal purposes, and receiving an appraisal in this format is of limited use to you if your intent is discovering the value of your business to sell it. That is because the appraisal may not reflect the actual market value of your business for the purpose of selling your business.

For whom is a business appraisal written?

Unfortunately, most business appraisals are written for those involved in litigation or other legal matters. Therefore, most use complex language that is difficult to understand and include formulas that are of little use to a business owner wishing to sell.

For example, most appraisals contain an in-depth analysis of national and local economic factors that affect the value of a business, which is required for appraisals intended for legal proceedings. However, most owners are already familiar with the economic factors that affect the value of their business and do not want to pay an expert to prepare a report to discuss these factors.

Appraisals must follow guidelines and standards, and many of these standards require the appraiser to analyze these factors when preparing the report. These guidelines are in place so that appraisals comply with the specific requirements for different types of legal proceedings. For example, an appraisal for a divorce may require a strict definition of value, such as “fair market value,” whereas an appraisal for another purpose may require the standard of “fair value.” Such differences may seem minute, yet appraisals must follow these exacting standards if the purpose is for litigation or Go to the full article.

Source:: Business 2 Community

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