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Home > Tools and Resources > Selling a Business > Why Get A Business Valuation?

Why Get A Business Valuation?

By The BizQuest Staff
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Determining the value of a business is a complicated and intricate process. Even valuation experts have referred to it as more of an art than a science. Valuing a business requires the determination of its future earnings potential, the risks inherent in those future earnings, an analysis of its mix of physical and intangible assets, and the general economic and industry conditions.

A business valuation is not just for a business owner preparing for a sale. In fact, there are numerous business and legal situations that require a detailed valuation. First, a detailed valuation is needed when a seller is considering a merger, sale or acquisition, or a shareholder wishes to buy-out other shareholders. Second, government or judicial authorities often require a business valuation for legal matters such as shareholder disputes, divorce proceedings, eminent domain takings, employee stock ownership plans (ESOPs), S corporation election, or breach of contract disputes. Third, taxable events, such as estate and gift planning, or charitable giving also necessitate a valuation. Finally, a detailed valuation can help identify what's needed to increase the value of the business, attract new capital, or project potential proceeds from an initial public offering (IPO). With this many potential situations requiring a business valuation, it's important to have an up-to-date professional estimate of the value of your business.

Sale/Acquisition
A valuation can not only assist business owners in determining the value of their business, it can also help them maximize value when considering a sale, merger, acquisition, joint venture or strategic partnership. While the value of a business estimated by a professional valuation may not perfectly match the price for which the business is sold, having a professional valuation lends validity to the selling company. When a business enters negotiations with another company, a due diligence process begins that can be lengthy and exhausting. Without well-organized documentation of a company's historical financials and future prospects, a business owner may end up conceding more to the purchasing company than originally intended. The valuation process will also assist a company in organizing these materials.

Legal Reasons
Certain legal matters will also necessitate a business valuation. Marital or business partner disputes, the establishment and management of ESOPs, eminent domain issues, the election of S corporation status, and minority shareholder actions all require that a detailed valuation be performed by recognized professionals. In some situations, the valuation must be based on specific standards of value established by law.

Taxable Events
Taxable events, such as estate and gift planning, also require a detailed business valuation. Unforeseen events can happen at any time, and it is important for a business to be prepared in case the detailed knowledge of an owner or key employee is suddenly absent.

Financing
A valuation is also an essential tool for a company looking to raise additional capital, through a private placement or an IPO, or if the company is considering a reorganization or change in strategy. A well-presented valuation gives a business more validity when approaching outside investors in an attempt to raise capital.

As the above examples illustrate, there are many situations in which a professional business valuation is a prudent and necessary process.

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