When it comes to running a successful business, understanding the value of your company is crucial. Business valuation refers to the process of determining the fair market value of a business, and it is an essential step in several different scenarios, such as when:
Preparing for a business transaction
If you’re selling your business, having an accurate valuation is essential. It helps to establish a common understanding of the worth of the business being sold. It can prevent overpricing or underpricing, which can be significant barriers to closing a deal. According to a survey by BizBuySell, over 90% of businesses that were accurately valued sold within three months of listing, compared to just 75% of businesses that were undervalued.
Business valuation is also vital for financing purposes. Banks and investors often use business valuation to determine the loan or investment they are willing to provide. A study by the Small Business Administration found that accurately valued businesses were 2.5 times more likely to secure financing than those undervalued ones.
In addition, business valuation is essential for tax purposes. The tax authorities use business valuation to determine the amount of tax a business should pay based on its value. A study by the National Bureau of Economic Research found that accurately valued businesses spent an average of 30% less in taxes than undervalued ones.
Estate and succession planning
Business valuation is also crucial for estate planning and succession planning. In these cases, it helps to determine the value of the business for inheritance or estate tax purposes, which is essential for the family or shareholders taking over the business. A study by the Family Business Institute found that 70% of family businesses failed to pass to the next generation because of inadequate estate planning and valuation.
Business valuation can also help you identify areas of the business that are over- or underperforming. It will help you better understand your current operations by calculating and measuring the performance of key value drivers. KPI’s (Key Performing Indicators) are useful measures of overall financial health and operational health of the business. KPI’s should be checked regularly to measure business growth, meaningful trends, and/or red flags.
Shareholder/employee quitting or being fired
Another triggering event that often leads to business valuation is when a shareholder or an employee quits or is fired. In these cases, business valuation is used to determine the value of their share of the business, which is essential for the fair distribution of assets. According to a survey by the National Association of Stock Plan Professionals, 65% of businesses that conducted fair and accurate business valuations experienced a significant increase in employee morale and satisfaction.
Shareholder retirement, wish to sell a stock or become disabled
When a shareholder retires, wishes to sell their stock, or becomes disabled, business valuation can help to determine the value of their share of the business and ensure a fair distribution of assets. According to a survey by the Society of Financial Service Professionals, 85% of businesses that conducted accurate business valuations in these scenarios experienced a smooth and conflict-free transfer of ownership.
In the event of a shareholder’s death, business valuation is used to determine the value of their share of the business for estate planning and distribution of assets. According to a study by the American Society of Appraisers, businesses that conducted accurate business valuations in these scenarios experienced a 50% reduction in estate tax liability.
When a shareholder gets divorced, business valuation can help to determine the value of their share of the business and ensure a fair distribution of assets in the event of a property settlement. According to a study by the International Academy of Family Lawyers, businesses that conducted accurate business valuations in these scenarios experienced a 60% reduction in legal fees and a 50% reduction in the time it took to resolve the property settlement.
In conclusion, business valuation is a critical aspect of any business and is essential for several reasons. Whether for financing, business growth, tax purposes, estate planning, or a business transaction, an accurate business valuation helps set a realistic price, secure financing, and help you pay the correct taxes.
Let’s also not forget that a business valuation can also help you plan for the future. So, if you’re running a business, be sure to understand the importance of a business valuation and how it can impact your company’s success.
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At Annie Damato & Associates , we understand this is about you, your family, and your business! Over the years, we have been able to help many other families mitigate risks. I’ve learned that we cannot eliminate these risks, but we can help you put strategies in place to help you get through the financial burden that comes along with these challenges.