If you are a business owner you understand the importance of valuation, as well as what supports and drives it. Valuations can help owners assess opportunities and costs, plan for growth and transitions, and develop exit strategies.
Simply put, a business valuation represents your company’s total worth or the economic value of your business. Valuations are used for a variety of reasons, including determining price and sale value, taxation and legal issues, donating company stock or raising capital. However, business valuation is most commonly used when a company is sold, merged or acquires another company.
If you have a family business that you built from scratch a valuation is critical. Having a valuation ensures that ownership in the business is fair to all family members and shareholders. But it also prepares you for future events such as when a shareholder dies or retires, or when shareholders vote to sell stock.
If you’re thinking about selling your business, read on for different ways to calculate the value of your business.
Your calculations
Wondering how to calculate the value of your business? This can be done in a variety of ways but is usually grouped into three primary approaches: income driven, asset driven and market driven. Common methods are market capitalization, the times revenue method, the earnings multiplier, discounted cash flow (DCF) method and liquidation value.
Power of Knowledge
Power of Knowledge
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Business valuations should be performed by a qualified professional who is certified (ABV) by the American Institute of the Certified Public Accountants (AICPA). To begin a valuation, a qualified professional will analyze financial statements. They might also include an analysis of the company’s management, its capital structure, future profits and earnings, and market value of its assets.
It’s important that a valuation is performed according to industry standards and best practices under the Uniform Standards of Professional Appraisal Practice (USPAP). When selling a business for retirement or otherwise, the IRS requires that a business is valued based on its fair market share.
Closing the deal
Succession planning for business owners doesn’t have to be complicated. Since 1996, the Hatley Law Group APC has successfully helped clients and their families in estate planning and asset protection. Whether you are selling your business, changing leadership, or simply considering your options, the Hatley Law Group can help secure your legacy for generations to come.
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