Most small-business owners have only a vague idea of what their businesses would really be worth if they wanted to sell. And most of the ones who think they know what the business is worth are probably wrong.
Professional appraisers who regularly conduct business valuations say that owners err on both ends of the spectrum. Some fail to include intangible assets in their estimate and tend to undervalue what they’ve built over time. Others think their businesses are worth much more than the market would dictate. And of course, sentiment often interferes with good business judgment.
In many cases, owners don’t consider putting a value on the business a top priority. But there are many reasons why you should have at least an idea of what it’s worth. “Even if your company isn’t required to have a valuation, it is still important to the future of the business to know what it’s worth,” said Donna Walker, a past president of the American Society of Appraisers.
Independent business appraisers value companies and business interests of all sizes, from small sole proprietorships such as medical practices to large corporations. A valuation includes intangible business assets such as patents, trademarks, employment agreements, copyrights and goodwill.
Business owners often bring in an appraiser to prepare for a purchase, a merger or an employee stock ownership plan. Or a valuation might be needed for estate and gift tax returns, buy-sell agreements, litigation, tax challenges, divorce or many other purposes.
Here are more reasons to perform a business valuation:
• To understand where your business fits in the industry landscape. A business valuation will describe precisely where you fit in your industry or specialized market, including the market price or value of similar businesses recently sold or publicly traded.
• To gain more insight into your real-world financial condition. As a business owner, you probably have P&L and other financial reports to give you a picture of your financial health. But a valuation that includes intangible assets can expand on, confirm or deny existing beliefs.
• Make fast decisions on expansion, financing, sale or merger opportunities. When opportunities knock, you might not have time to conduct a business valuation. Having a current valuation in hand will let you pursue opportunities as they arise.
• Make smart choices to enhance the value of your business. A valuation will highlight the things that make a business valuable, and show you ways that you can increase what your business is worth.
Daniel Kehrer can be reached at editor@business.com.
Beyond Cash Donations: How New Forms of Giving Are Transforming Not-for-Profit Accounting
Evolving Funding Landscape for Not-for-Profits Not-for-profit organizations are being asked to do more with less,…
Learn More
