Selling your business may be the most important financial decision that you ever make.
A business purchase is also a big event for the buyer, and both parties in the transaction want to negotiate a fair price. A business valuation is a major component of the price ultimately received for a business.
Owners should insist on a certified business valuation, which can benefit both the buyer and seller.
8 Benefits of a Certified Business Valuation
A certified business valuation provides a number of benefits that can move the buyer and seller to a successful sales transaction:
1. Private companies
A private company’s equity does not trade on a public exchange, so market value is difficult to determine. A certified valuation provides stakeholders with a reliable estimate of value.
Both buyers and sellers are more likely to accept a certified valuation. A certified review requires the analyst to follow accepted industry guidelines. As a result, the conclusions reached in the valuation may be accepted by both parties.
3. Legal dispute
A court of law is more likely to accept a valuation from a certified expert. If business partners want to dissolve a partnership, for example, the owners may disagree over the value of the firm. If the case goes to court, a judge may rely on a certified valuation to determine the company’s value.
4. Estate taxes and gift taxes
Several tax situations require a business valuation. If an owner or partner passes away, the value of the firm may be included in the owner’s gross estate. The tax preparer needs a business valuation to file the estate tax return.
When an owner gifts shares of company stock, the transaction may generate a gift tax liability. To calculate the owner’s gift tax, the CPA needs a business valuation. If an estate or gift-tax return is audited, a valuation prepared using certified valuation standards is more defensible.
5. Industry-specific analysis
A certified valuation will consider the unique factors of a particular industry.
An asset’s value may be more than the book value listed on the owner’s books. Assume that a manufacturer owns a piece of equipment that allows the firm to operate more productively than the competition. A competitor may pay far more for the asset than the seller’s book value.
A valuation can also assess the value of intellectual property (IP). This type of analysis requires industry knowledge and expertise. If the IP value is documented in a certified valuation, the buyer and seller are more likely to agree on the assigned value.
6. Buy/sell agreement
Many owners use a valuation to determine a sale price, if one owner decides to leave the business. Deciding on a process in advance makes a potential transaction between owners much easier.
7. ESOP valuation
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets the minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in the plans.
ERISA requires a third-party expert to place a value on the shares of an Employee Stock Ownership Plan (ESOP) each year, in order to determine a fair stock price.
8. Marriage dissolution
In a divorce, the spouses must determine the fair market value of any business interests. A valuation allows the spouses to enter into an equitable division of assets.
Several types of professionals can provide a certified business valuation.
Types of Credentials
Buyers and sellers may agree on a specific valuation expert with one of these credentials:
- Accredited in Business Valuation (ABV): The AICPA grants this credential to CPAs and qualified valuation professionals.
- National Association of Certified Valuators and Analysts (NACVA): NACVA supports users of business valuation and financial litigation services by issuing the Certified Valuation Analyst (CVA) designation.
- American Society of Appraisers (ASA): This organization confers several credentials, including Accredited Senior Appraisal.
Once you retain a professional to provide your valuation, he or she may use several approaches to establish a value for your business.
Here are three frequently used valuation methods.
Equity (or book value) is the difference between assets and liabilities. If you were to sell all of your assets for cash, and pay off all liabilities in cash, the amount of cash remaining would be your firm’s equity.
An analyst may use the fair value of assets and liabilities to calculate business value. It’s important to include only those assets owned by the company, and not assets personally owned by the founder.
This approach calculates the value of the business based on a firm’s ability to generate cash inflows.
Using this approach, the analyst will consider the expected cash flows that the business can generate in future years. The valuation may use other metrics, including earnings per share, to assess the value of the business.
A valuation should also consider recent sales of companies in the same industry.
This approach considers the value of similar businesses that have been sold recently. If the seller owned a furniture manufacturer, the analyst would consider the recent sales of other manufacturers in the same industry.
Your valuation may apply all of these approaches to place a value on your business.
A business sale is a complex and time-consuming process, and you need a trusted advisor to help you throughout the process.
How Raincatcher Is Different
The team at Raincatcher focuses on providing the best advice about the market, industry, and whether your business is ready to sell.
Their objective is to educate the seller about their available options, and they can quickly connect you with valuation experts and other professionals who can help you sell your business.
The Raincatcher team has worked with thousands of businesses, and they have the small business entrepreneurial spirit. They know how hard small business owners work to grow their companies.
Raincatcher will act as a business broker to market your business and find qualified buyers. They will offer recommendations to help increase the value of your business, and help you obtain the maximum possible price for your firm.
Work with Raincatcher, and move forward with confidence.