Valuation – Definition and Reasons for Business Valuation

Valuation – Definition and Reasons for Business Valuation

Why a Business Valuation?

Many business owners, business buyers, business vendors, and many others need business valuations for a wide variety of purposes. Those purposes vary from considering the purchase or sale of a business to complying with a court order to repay a legal issue. Frequently, business owners just want to have an idea of the present value of their business.

Here are a few of the reasons people come to us or use our business valuation software tool for business evaluation. 


Just as people like to check their stock portfolio from time to time, small business owners prefer to get an idea of their company’s worth and changes in its value. Our valuation tool can give you a good idea of your business’ worth, based upon your answers to several financial and non-technical queries. A fundamental valuation is free!

Buying a Business, First Evaluation

Often, business buyers are bewildered as to how a vendor arrives at an asking price for his or her business. Sometimes, the asking price is not based on any rhyme or reason. Before getting too involved in negotiating a business acquisition, it is a good idea to determine whether the asking price is at the ballpark. A difference of 10% to 25 percent (asking price vs. separate valuation) is usually bridgeable. However, if the difference is much more than 25 percent or so, chances of seller and buyer getting into an agreement are fairly slim. Learn more.

Buying a Business, Offer & Negotiation Stage

When it’s determined that sellers and buyers are in the same ballpark, a more formal valuation will be very valuable. It is one thing to ask a vendor to lower his price by 20 percent; It is quite another to show that vendor an independent valuation that details the reasons for the offer price.

Selling a Business, Early Preparation

The decision to market a business rarely occurs overnight, and neither should the planning. The time to begin planning for the sale of a business is 1 to 3 decades before the target date of the sale. A key element of planning is an objective opinion of your company’s value. That is important not only for setting reasonable expectations and a fair asking price. It’s also important because there are several clear steps you can take to boost the value of your organization and to make the sale easier and quicker if you start planning. Start here.

Selling a Business Within One Year

If you’re planning to offer your business available within a year, it’s time to find a valuation along with a little professional advice. Setting the incorrect asking price, or even the right asking price without proof to support it could be fatal. Also, there is a lot you can and should do to make the business more salable (and more valuable) if you do not wait until its too late.

Taking on a New Partner or Buying Out a Recent Partner

Note that in this context we’re utilizing a spouse to mean any individual or entity which has possession. This is a stockholder in a company, a member of an LLC, or a partner in the legal sense; a partner in a venture entity.

More often than not there is a difference of view regarding the value of one’s partnership (or stock or membership share) in a tightly held firm. A third party valuation is your best way to reevaluate disagreements and arrive at a reasonable buyout (or buy) deal.

Loan Proposal

Banks and other creditors use many different standards in making lending decisions. A fantastic independent business valuation can make the difference between a loan rejection and acceptance. In the current tight lending environment, a business borrower requires every advantage he can muster to get that acceptance.

Loan Proposal, SBA

The Small Business Administration (SBA) has specific rules for business valuations that it will take (as detailed in SBA SOP 50-10 5b). If you are applying for an SBA direct or SBA guaranteed loan, then any submitted issuer must adhere to SBA rules.

Raising Venture Capital or Independent Investment

Professional venture capitalists as well as independent investors are first and foremost looking for a return on their investment. While investors understand they are taking a risk, a nicely documented independent appraisal can go a long way toward mitigating the perceived risk, and toward obtaining you the right deal for the investment you want.

Estate Planning

For many business owners, the largest single element of the estate is your business they have. However, several business owners in this circumstance don’t understand the value of their biggest holding. For an assortment of reasons ranging from tax preparation to strengthening your dreams are correctly completed without difficulty or conflict, a business valuation is essential for proper estate planning.

Estate Settlement

When a moving business is an advantage of an estate, a valuation is essential and often demanded by a court, taxing authority, or both. Unfortunately, disagreements are common in lots of aspects of estate settlement, and also the worth of a business that’s in the estate is no exception. It’s not uncommon that contesting parties will each keep grading experts who ascribe substantially different values to the identical business. It is best to hire a valuation specialist with extensive experience with valuations for real estate purposes and in testifying to safeguard her or his valuation in court.

Divorce and Additional Legal Helpers

Business valuations are very often necessary for divorce settlements as well as other settlements where a court or arbitrator is called on to make decisions concerning equity. In such situations, it is not uncommon that contesting parties will each retain valuation specialists who ascribe substantially different values to the identical business. In a situation that may end up facing a judge or arbitrator, it’s best to seek the services of a valuation specialist who has expertise in court testimony.

Improve the Value of a Business

You will find comparatively simple steps that may enhance the value and saleability of many, if not most businesses. This involves analyzing the business’ weakness in the buy-sell perspective and correcting those flaws. Some measures by way of example are as easy as placing verbal agreements in writing or procuring a lease renewal option. Other measures take a little more effort but can be well worth that effort. The place to begin is with an initial valuation that identifies a company’s strengths and weaknesses and also the projected cost, effort, and advantage to mitigate these weaknesses. We would be delighted to discuss the options of enhancing your business’s value and salability, before placing it on the market.

Brian Thomas

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