The 5 W’s of Business Valuations: What Every Business Owner Should Know

There shouldn’t be a specific reason for you to have a business valuation, every owner should know the value of their business. Regardless if you are looking for bank financing, venture capital, or looking to improve your insurance portfolio, you should always have an idea of your economic worth.

However, before you call somebody to give you an independent valuation, have a little foreknowledge so you can speak confidently and intelligently about a valuation.

What are Business Valuations?
A business valuation is an educated estimate of the economic worth of a business. The process is also used to establish the economic worth of a portion of a business. This is especially important when the partners of a business are considering the worth of individual shares of a company or looking for insurance products.

When (and why) Should You Get A Valuation Done?
There are several triggers for business valuations. Some common reasons business valuations are conducted:

• The impending sale of a business
• A partner, or partners, announce they are retiring and want to sell their shares
• A business valuation may be necessary for insurance purposes
• Tax issues may require a valuation
• Divorce proceedings involving principals may also require a valuation

Who Does Business Valuations?
There are several professions that commonly value businesses. These include:

• Accountants
• Mergers and Acquisitions Attorneys
• Professional Business Evaluators
• Insurance Professionals
• Business Brokers
• Commercial Real Estate Agents
• Business Consultants

Whom you choose is largely up to you, though if you are getting the valuation done as part of the requirement for a loan or other business deal, determine who is paying the evaluator, and who will sign the contract for the evaluators services.

For example, a bank may tell you that you have to pay for an evaluation, and then send the evaluator to your place of business. Even though you are paying him, he may have a conflict of interest with the bank since they give him a steady stream of business.

Where Do Business Valuations Occur?
Typically, a business valuation will involve a tour of all of your physical sites, an inventory of your tools and equipment (including cars), and a thorough audit of your business records. Plan to make some time to sit down with the auditor to answer questions and to explain your operation and finances.

Did You Notice That ‘How’ Wasn’t Included?
There is a reason for not mentioning how an evaluation is conducted.

Truth is, there is no ‘one’ way to do a business valuation. There are several methods and factors that go into a valuation, and not all methods are appropriate for all businesses. So, before an evaluation begins, talk to evaluator and ask what method will be used, and ask why he chose that method.

The time needed for a valuation depends on the size of the business, your schedule, the amount of records an evaluator looks at, the time to learn about your company, and other factors.

Some of the more common methods used in business valuations are:

• Market Capitalization
• Liquidation Valuation
• Discounted Cash Flow
• Book Value
• Earnings Multiplier

The auditor may also use a combination of these methods. It all really depends on the size, operation, and organization of your business.

Flagler Financial has done numerous business valuations for a variety of companies across a wide range of industries. If you are considering a business valuation, or are interested in knowing more about the process, we encourage you to contact us. We would be more than happy to sit down with you and answer your questions.