Do I need a business valuation?

What is a business valuation?

A business valuation is the process of determining how much a business is worth. The process will be determined through several factors that contribute to the current or perceived value of a company. It may be performed for a potential investor or interested buyer. It can include both the economic value of intangible and tangible assets. What is the difference between the two? Below are some examples of each and how they may affect a business valuation.

Tangible Assets are any asset that can be seen and touched.

- Property, Buildings, Equipment, Vehicles, Inventory

Tangible assets are comparatively easy to price, and therefore they are often used to express the value of a company. However, because they do not include intangible assets but include valuable things like patents and brand recognition, they may not truly express a company's value.

Intangible assets are any asset that cannot be seen or touched.

- Patents, Brand, Goodwill, Trademarks, Intellectual Property, Trade Secrets

Intangible assets can be difficult to price if one does not have the resources to properly calculate the perceived dollar estimate and sometimes may be excluded in a company's valuation for not being able to be presented correctly. A specific intangible asset could mean the difference between a $1 million dollar or a $5 million dollar valuation.

Valuing the assets are just a part of the process. The financial health of the company can also affect the proposed worth of the business. A detailed cash flow analysis, balance sheet, income statement and sales pro forma are just a few of the documents to establish the quality earnings for an entity. Other items to consider are the reputation score, agreements or contracts, market saturation, demand, and current economic climate.

Conclusion

A business valuation is a tool that allows business owners, investors or potential buyers understand both the current and potential worth of a company. It can be used for several reasons. Below is an example of some of the reasons to value a business.

· Partnership buyouts, buy-ins

· Mergers and Acquisitions

· Succession Planning

· Estate Planning and Gift Tax

· Buy-Sell and Shareholder Agreements

· Employee Stock Incentive Programs

· Financing

Business valuations can be used for a variety of reasons and several methods of valuing a business contribute to the overall fair market value. Best practices would be to work with a professional business valuation for an objective estimated worth before beginning the negotiation process.