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How a valuation can help you understand the full scope of your business

Taking the time to understand the value of your business is an often overlooked yet crucial factor to your company's success. While this information is especially important when it comes time to sell your business, it can also help you make informed decisions about your company's future and growth potential.

Determining the value of your company can be a complex process. Here's what to consider as you begin to assess the value of your business:

What is a business valuation, and why do you need one?

A business valuation is a set of processes and procedures that are used to determine the economic value of a business. A valuation is most commonly used to help determine a listing price when an owner wants to sell. Understanding your business's value can help you maximize profits and knowledgeably negotiate the sale of your company.

A business valuation isn't just crucial for getting the most from the sale of your business, however. Other benefits include:

  • Aiding in future business decisions. Knowing your company's value can help you determine what areas need focus and growth as you make informed decisions about the future.

  • Succession and exit planning. If retirement is on your mind, understanding the value of your business can help you map out a timeline and start training your replacements.

  • Legal proceedings. The value of your business will often be used during estate planning or other legal proceedings such as divorce filings or partnership disputes.

  • New financial endeavors. Many financial institutions and even the SBA will require a business valuation before finalizing a loan.

What key factors should be considered when evaluating?

Financial reports such as balance sheets, tax returns, and cash flows are vital to the valuation of your business. But these numbers are not the only factors that you should consider. Other aspects include:

  • Both tangible and intangible assets.

  • Your business's geographic location.

  • Current market conditions.

  • The history and nature of your business.

  • Your exit plan/your plan for the future.

Keep in mind that your financials are often recorded in a way that maximizes tax mitigation. This is helpful when the goal is to pay as little tax as possible, but it doesn't represent the actual value of your business. To understand the economic value of your business, things like the owner's salary, employment taxes on the owner's salary, and owner perks often need to be added back to the net income.

What are the different kinds of valuation reports available?

You have a few options when it comes to receiving a valuation of your business from a professional.

  • Calculation Report. This is a simple report often used for internal purposes and is not the same as a formal broker opinion of value.

  • Summary Report. This report includes a summary of the financial reports and valuation methods used. Because a summary report is more detailed than a calculation report, it works well for those that need an official opinion of value.

  • Detailed Report. This is the most comprehensive report of the three making it the most useful for situations where there will be high scrutiny of the business's value. This report includes in-depth details of the company's history, health, and financials, among other things.

Which report you need will depend on your situation and needs. A business broker can help you determine whether you need a Broker's Opinion of Value or a Certified Valuation Report.

Have questions?

Keep in mind that the valuation information here is an overview. Determining the value of your business can be a complex process, but you don't have to go it alone. An experienced business broker can help you determine the value and even provide a free assessment of value to help you get started. Contact us today to help you with your business valuation needs.

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