What is Business Valuation? Why & When You Need One
Steve Mize, ASA
Business Valuations are critical for sale, transition, and business planning. If you’re in one of these dynamic time periods in your own business, you may be left with the question, “What is business valuation?” Put plainly, a business valuation is the value that has been determined by an accredited appraiser of the ownership of a business. Basically, a business valuation helps you know what your business is worth from an all-encompassing perspective.
If you are an entrepreneur or business owner, understanding business valuation, why, and when you need one is essential. Here’s a quick rundown of what you need to know about valuation, and the process you might expect to encounter in order to get one.
To arrive at an estimation of value, as a starting point you can expect an accredited appraiser to:
- Review financial statements
- Identify income statement and balance sheet adjustments
- Review the business operation
- Determine the appropriate valuation model
- Review economic and industry data
- Compare market transactions for similar companies
The analyst will also likely consider additional factors:
- The capital structure of the business
- Prospects for future earnings
- The market value of physical assets
- Specific risk factors such as customer concentration, key employee dependence, etc.
A business valuation professional considers three standard approaches as part of a business valuation:
- Cost Approach, a balance sheet approach which estimates the value of a business as the sum total of its assets and liabilities
- Market Approach, which measures the value of a business based on transactions of similar businesses within the same or similar industry that have sold in the open market
- Income Approach, which estimates value of a business based on cash flow and risk
Business risk is always an important consideration to value your business. Methodology to interpret risk will vary from one valuation firm to the next.
Who requests a Business Valuation – and why is it necessary?
The need for a business valuation arises for several reasons, and the request can come from different sources. For a closely held business, the valuation plays an important role for purposes that include – but are not limited to – business planning, determination of tax liability, applying for a business line of credit, and listing a business for sale.
A prospective lender may request a valuation to support a loan for a business acquisition, partner buy-out, or to refinance debt. If you are pursuing SBA-backed financing, a specific set of valuation guidelines will apply to meet the SBA’s standard operating procedures.
If you are considering the sale of all or part of your business, a business broker (acting either for you or a prospective buyer) will need an objective and independent estimate of value for the business to anchor any negotiation.
Whether for the purposes of estate planning or exit planning, a CPA or financial advisor can use a business valuation to help you plan for a secure future for you and your family. Gift and estate tax returns that include a well-supported and documented valuation will help defend the value of the business to taxing authorities.
Should you need to defend the value of your business as part of a shareholder dispute, purchase or sale process, or divorce, your attorney will need a credible valuation to support your case.
The most accurate valuations are a combination of both science and art.
You’ll hear it said that business valuation calls for both science and art. Valuation science involves extracting a cogent, defensible story from the numbers, while the art deploys human wisdom and experience to ensure that less tangible – but always important – variables receive appropriate consideration.
If you want to develop a better understanding, take a look at our free, comprehensive guide: How to Navigate the Business Valuation Process Successfully.
Questions about valuing your business? Please contact us, and an accredited GCF appraiser will get in touch with you directly.
Your GCF Business Valuation appraisal team has one or more of the following business valuation accreditations:
- Accredited Senior Appraiser (ASA) – is recognized as having achieved the highest level of education, training, and report writing for business valuations. The ASA designation is the gold standard for a business valuation professional. (source: American Society of Appraisers)
- Certified Business Appraiser (CBA) – a very prestigious credential in the eyes of all who are familiar with it as it earned the reputation of being a difficult credential to obtain. (source: National Association of Certified Valuators and Analysts®)
- Accredited in Business Valuation by the American Institute of CPAs (ABV by AICPA) – a credential granted exclusively by the AICPA to qualified valuation professionals to who demonstrate expertise in valuation through knowledge, skill, experience and adherence to professional standards. (source: American Institute of CPAs)
- Accredited in Business Valuation (ABV) – credential is granted exclusively by the AICPA to CPAs and qualified valuation professionals who demonstrate considerable expertise in valuation through their knowledge, skill, experience and adherence to professional standards. (source: American Institute of CPAs)
- Certified Public Accountant (CPA)
- Certified Valuation Analyst (CVA)
Over 25 years of experience and expertise in business valuations and appraisals. An accredited appraiser receives extensive training, remains in good standing, and follows specific industry practices to determine the value of a business.
GCF’s Machinery and Equipment Appraisal Accreditations
- Expert Equipment Certified Appraiser (EECA) – Our appraisers are recognized with a deep understanding of valuation principles and extensive experience by the Institute of Equipment Valuation.
- Certified Machinery and Equipment Appraiser (CMEA) – a CMEA professional has the expertise and certification to conduct a third party machinery and equipment appraisal.