The most common reason for performing a business valuation is that either the buyer or the seller of the business, or both, wish to have an objective and independent, professional appraisal of what the business is worth. Often, these valuations are used as the basis for the negotiation of the selling price. There are, however, a number of other reasons for getting a business valuation. Some of the most common ones are listed below.
Mergers – When two companies merge, it is necessary to determine the relative values of both companies in order to determine the proportion of ownership each set of shareholders will have in the new merged company.
Obtaining Financing – Companies need financing because they expect to grow the business and need to support their working capital requirements.
Most businesses have created valuable brands, goodwill, customer lists, proprietary processes and knowledge that do not show up in financial statements. Some companies that have large investments in real estate and equipment may find that the earning ability of those assets is far greater than their depreciated book value. A professional appraisal will support management’s request for financing.
Estate Tax Planning and Gift Taxes – Determining the value of closely held businesses is important for estate planners as well as when determining the value of lifetime gift transfers that includes stock.
Minority Interests – Many companies try to accommodate minority shareholders who seek liquidity and who may not have good alternatives other than selling their shares back to the company. A valuation is a way of determining the fair market value of the stock in a buy-back.
As a Management Tool – An independent and objective business valuation provides an effective way for a business owner to benchmark his business and compare it to other similar businesses in the industry and gain a new perspective. It can help management discover weaknesses in the business as well as overlooked strengths that may be capitalized upon when developing strategic plans or exit strategies.
The valuation can be a very useful tool for business owners planning an exit strategy since it can provide valuable insights on how “the market” determines value and what needs to be done to make the business more valuable in advance of the transition.