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Business Management Review | Tuesday, March 22, 2022
Valuations are needed to resolve tax or legal issues.
FREMONT, CA: Business owners spend considerable time and energy trying to boost company value by developing growth plans with clear goals. These plans are designed to magnify value over time, but achieving those goals is hard without knowing where to begin.
Not only should owners understand what their business is worth today, but they must also know what supports and drives that value. Unfortunately, owner overconfidence or apathy generates this step to either be neglected or downplayed or, at a minimum, according to incomplete data or conjecture. If so, a valuation usually serves as a reality check for owners with a biased or unaware viewpoint on what their business is worth.
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The necessity of a valuation for the business owner.
Valuations are needed to clear up tax or legal issues. Valuations are performed for myriad reasons, including but not limited to selling or acquiring a business. For example, valuations are needed in cases of death, disaster, divorce, or disability to equitably determine the business assets based on terms spelled out in legal filings.
Valuations are much needed when gifting or donating company stock as part of a charitable contribution, resolving IRS or shareholder disputes, or converting a C-corporation to an S-corporation. In addition, there could be requirements in a buy/sell, partnership or shareholder agreement that demands a business valuation.
Moreover, owners would commonly perform a valuation when trying to raise strategic capital or obtaining a Small Business Association (SBA) loan. Implementing an ESOP(Employee Stock Ownership Plan) would necessitate an initial and annual valuation.
Moreover, a formal business valuation can help reconcile perceived opinions on value, coupled with a salability analysis; it can support a business owner decide relative value in the marketplace.
How does the business valuation process work?
The assessment of value is an art form as much as a science. Business valuation is a set of procedures employed to estimate the economic value of an owner’s interest in a business. A correct valuation of a closely held business is an important tool for a business owner to evaluate both opportunities and opportunity costs as they plan for future progress and eventual transition. It gives either a point-in-time assessment of comparable value for an owner or perhaps the price a buyer would be willing to secure the business.
On its face, business valuation is a relatively straightforward concept. First, a qualified professional analyzes the company’s financial statements and considers comparable transactions, industry ratios and other quantitative and qualitative information.
Then, applicable adjustments are made to adjust the subject company to an industry standard or benchmark. The outcome is a reasonable, fair value assessment performed under the Uniform Standards of Professional Appraisal Practice (USPAP).
Despite the benefits, many business owners are apprehensive about what to expect when going through the valuation process. Sometimes, valuations can expose areas of the business which take away from value, for example, weak financial and accounting controls, under-performing assets and weaker operating ratios related to its peer group. Nevertheless, the entire valuation process can provide an overview of the strengths and weaknesses of the reviewed company.
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