What Are Business Valuations Used For?

Company valuations are commonly used as a process for determining the current fair market value of a company, and can be used for a number of different purposes, which are covered below. The process of valuing a company should be done carefully and truthfully, as business valuations serve as a critical foundation for proper decision-making for both the present and the future.

Selling a Business

If you are considering selling your company to a third party through a merger or acquisition, you obviously want to get every penny that it is worth. Getting an accurate business valuation will allow all parties involved to arrive at sale price as accurately as possible. The asking price should be fair to prospective buyers, but you do not want to sell for less than the business is worth. A proper company valuation can protect you from leaving money on the table in a deal.

Acquiring a Business

Just as you want an accurate sale price if you are selling your business, you equally want an accurate sale price if you are buying one. While a true business value boils down to what a buyer is willing to pay, a solid company valuation will assess the market conditions, potential earnings, and other important factors to ensure that the investment is viable.

Exit Planning

Having an exit strategy in place is hugely important for all business owners. It helps you carefully plan your exit to maximize the value of your company while minimizing your risk, regardless of whether you plan on selling now or much later down the road. It is wise for getting your business ready for your retirement, but it’s much more than that. It also protects your business’s value in the event of an unexpected sale. By doing an annual valuation, it will ensure that you have accurate data on your company’s fair market value in case you need to sell before you thought you would, addressing both voluntary and involuntary transfers. Protect the value of what you have built, and create a smooth transition for your management team. You can also use your valuation to craft a strategy to increase your company’s value as part of your exit plan.

Litigation

In the unfortunate event that your business ends up in a court case, whether it’s a personal injury suit, your own divorce, or something else, you will likely need to provide proof of your company’s value. This is so that if there are any damages to be paid or assets to be divided, they are based on the actual worth of your company and not a random estimation. A valuation is also needed if you are facing bankruptcy.

Strategic Planning

All businesses have limited resources so strategic planning is essential to ensuring a realistic roadmap for success. A current valuation of your business can provide you with useful information to help you make informed business decisions, and can help you set clear goals that can be achieved through specific actions. It can help you identify weaknesses, analyze expenses, compare annual performances, spot growth patterns, and even plan for restructuring.

Funding

If you are seeking capital from investors or lending from a banking institution, you will need an accurate company valuation for the negotiations. Lenders will expect to see credible documentation of your company’s worth before they will consider doing business with you, and investors are not going to just hand you money without doing their homework on the business.

Selling Share in a Company

Your company valuation provides you with the worth of the actual shares of your business, so you are ready if you want to sell them, just as you would if you were selling the business itself. It is also important to know this information in the event of a shareholder dispute, or if you want to create employee stock option plans. 

Insurance Purposes

A valuation can be helpful in determining a value needed to cover your business interest value if something were to happen to you as the owner, known as “key person insurance.” This allows for a payout value to your family to continue your role, or buy themselves out of your role.

Tax Reasons and Estate Planning

Your business valuation can be used to make sure that you are in compliance with tax regulations, and it can also lessen your tax burden. If you are planning your exit, knowing the value of your company is important for estate tax reporting, gift tax planning, stock options, share value of an employee stock option plan, or for shareholder purposes.