Change Country

Transaction Support

3 Business Valuation Considerations For Owners

Posted on May 9, 2022 by

Tim Hilligoss

Tim Hilligoss

Share This

Tim Hilligoss - TransactionsAccording to the U.S. Chamber of Commerce, business valuation is defined as “the process of determining the economic value of a business.” The valuation process gives owners, potential buyers, or other interested parties a reliable way to understand what a business is worth at a specific point in time.

A complete business valuation looks at all aspects of the business – things like the overall balance sheet picture, key personnel, market value of physical assets and intellectual property, and a forecast of potential revenue. 

Top Reasons to do a Business Valuation 

Business valuations are important for transferring or expanding ownership inside the organization, for special tax considerations associated with gifting/estate planning and for S corporation elections, or when the company needs to raise capital for operations, expansion, or equity distributions. 

In all these instances, interested parties must make important financial decisions that may have long-term implications. A properly structured business valuation helps the parties make these judgments with more confidence through a shared and objective view of a company’s worth. Business valuation is also critical in matters that involve litigation or specific tax liabilities: 

  • Formation of employee stock ownership plans (ESOP) 
  • Management equity plans 
  • Exit planning or buy-sell agreements 
  • Bankruptcy proceedings, shareholder disputes, or divorce litigation 
  • Determination of economic damages in fraud or intellectual property litigation

How the Business Valuation Process Works 

There are several accepted ways to establish the fair value of a business. The one that fits your situation best will depend in part on your individual business model, the norms that apply to the industry in which you operate, and the practices of your evaluation partner. In most cases, your assessment will be performed in accordance with a professional business valuation standard. The process usually begins with a review of your company’s financial statements and comparisons to accepted industry metrics or benchmarks. 

3 standard approaches that are accepted by the AICPA’s (American Institute of Certified Public Accountants) business valuation standards include:  

1 – Income Approach 

2 – Asset Approach 

3 – Market Approach 

Key Considerations for Business Valuation 

Apart from the direct transactional benefits of business valuations, they can also give owners valuable insights into their operations, including parts of the business that may be underperforming. Shoring up these areas can help prevent lost value in a future sale. 

  1. Be clear on the purpose of the valuation. Are you preparing for a specific kind of transaction, or will this valuation serve as an overall baseline on the health of the company? You will get a more useful result if you and your evaluator are aligned on your objectives. 
  2. Establish the right valuation frequency. The right business valuation cadence depends on the volatility of your market sector, your company’s sensitivity to regional or national legislative or regulatory activity, and market fluctuations for labor and materials. Generally, if you have never done a formal valuation, the sooner you start, the better. 
  3. Pay attention to factors that may not appear on your balance sheet. The quality of your customer relationships, industry maturity curves, or high reliance on key personnel could also have an impact on the value of your business. Make sure that you and your evaluator are taking a 360-degree view of important influences that may reveal hidden value in your company. 

How to Get the Right Business Valuation Help 

We advise business owners in the manufacturing, automotive, architecture and engineering, and industrial automation industries. We can help you get the right guidance on business valuation from accredited appraisers. Contact us to further discuss your individual business situation.

Tim Hilligoss

Shareholder

As a trusted advisor, Tim guides clients through business transactions, tax issues and international expansion.

Related Insights

Transaction Support

Is Your Business Transaction-Ready?

Posted on August 3, 2022 by

Tim Hilligoss
Traditionally, due diligence is a buyer’s responsibility when an M&A transaction is on the horizon. Conventional wisdom and best practices support the idea that this is the buyer’s opportunity to discover in detail what they’re getting for their money. However, the due diligence process is also the seller’s opportunity to showcase the business in the most favorable light.

Transaction Support

Considering a Sale? Financial Reporting Matters

Posted on April 20, 2022 by

Tim Hilligoss
Ben Smith
Having the right financial statements in place is vital for many reasons, but especially when you may be considering the potential sale of your business. When it comes to financial reporting, buyers and sellers frequently have different priorities in mind so they may be looking for different things when reviewing financials.

Transaction Support

It’s Time to Plan Your Business Exit Strategy

Posted on March 15, 2022 by

Tim Hilligoss
Ben Smith
Selling your business ownership stake at the right time – and for the right price – can be a challenge. To make matters even more uncertain, today’s buyers are more sophisticated than ever – especially with rising private equity influence. The earlier you start crafting an exit strategy, the better.

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Skip to content