Ten Important Facts About Business Valuations

1. Why are business valuations needed?

Business Valuations are carried out for many reasons. They are sometimes needed to provide information for important transactions like purchase-sale contracts, business financing, mergers, divorces, estate planning and partner disputes. They are necessary to ascertain how much a business should be valued or taxed, how much it needs to give back to the community, or for the processing of financial reports. In certain conflict situations, a business may need to be valued in order to file for bankruptcy or in order to be split between a married couple who are divorcing.

2. What standards are business valuations held to?

In order to ensure that business valuations are transparent and trustworthy, and depending on the use/application certain standards are set and must be adhered to strongly by business appraisers. For example, in the US, some business valuations are governed by the Uniform Standards of Professional Appraisal Practice (USPAP), and all certified appraisers must perform their work in line with it.

3. How is the value of a business determined?

There are three ways to value a business. The Income Approach calculates the possible value to be gained from investing in a company against the risk involved in doing so. The Market Approach compares the company in question against its peers, while the Asset Approach calculates the total value of the assets a company owns against its liabilities in order to arrive at its value.

4. Can business valuations become obsolete with time?

Business valuations show the position of a company at exact points in time. Because everything changes with time, it is possible for the calculated value of a business to rise or fall over a period, making previous valuations obsolete.

5. Can there be multiple values attached to a business?

Value is typically determined through negotiation between someone looking to buy a business and someone looking to sell a business. If there is more than one person interested in purchasing a business and they have differing reasons for doing so, each one will attach a different value to the business which they are willing to buy for.

6. How are legitimate business appraisers identified?

A reputable business appraiser can be identified by his or her qualifications. When starting a career in business valuation, qualifications like the Certified Valuation Analyst (CVA) or the Accredited in Business Valuation (ABV) are good starting points. However, more experienced and trained appraisers go after qualifications like Certified Business Appraiser (CBA) or Accredited Senior Appraiser (ASA).

7. How do I critique a business valuation?

A business is value based on one person’s beliefs, and this is always open to critique. To do this, an interested party could engage a different valuation professional to prepare a rebuttal valuation based on criticisms such as inappropriate valuation methods, normalization errors and purchase price justification tests.

8. What information does a business appraiser need to value the business?

In order to accurately value a business, an appraiser will need the company’s financial and operational information; including its financial statements for at least the past three years of its operation as well as forecasts carried out for the coming three years. An appraiser will also need a full list of the company’s assets and liabilities as well as any other reports that may have been carried out by other professionals regarding the health of the business.

9. What other uses can business valuations have?

Besides providing information for transactions and taxation, business valuations can help owners highlight the places where a business is taking too much risk, or help business owners identify spots where the business may need to improve on its actions and performance.

10. How much does it cost to have a business valued?

This is dependent on the size of the company being valued, and whether the appraiser will charge a fee for the project or bill per hour. However, owners of businesses between $1m in revenue and $20m in revenue can expect to spend between $5,000 to $25,000 for a business valuation.