Are you looking for a small business valuation appraisal? If you own a business, or are a shareholder in a business, or are considering purchasing a business, you’re probably familiar with the need for small business valuation appraisals. If you haven’t had the need for a small business valuation appraisal yet, you definitely will at some point in time. A small business valuation appraisal is a critical part of purchasing, selling, running, transferring ownership of, or closing a business.
To understand the fascinating world of small business valuation appraisals, check out our list of frequently asked questions, below:
Frequently Asked Questions Regarding Small Business Valuations
- What is a small business valuation?
The obvious answer to this question is that small business valuations indicate the value of a small business. The less obvious answer to this question depends on the purpose of the valuation. For example, if your business was going through bankruptcy, your business valuation would calculate the market value of your assets in contrast to the total of your debt, to determine what your total debt is. On the other hand, if you were selling your successful business, your business valuation would calculate the earning power of your business in the future, regardless of the market value of your assets.
- What reasons would I need a business valuation?
We aren’t going to include an exhaustive list of any reason you would ever need a business valuation, because that’s not possible. But here are a few common reasons:
- Business transactions. You business valuation will be important for buying or selling a business, for gaining (or buying out) investors, and for securing financing for your business operations.
- Assessing tax implications. You’ll need a valuation for estate planning, or for filing a return after inheriting a business, or for giving stock in your business as a bonus or incentive, or for establishing a taxable entity, such as a Family Limited Partnership.
- Legal purposes. Your business valuation will be important if you go through a divorce, if the shareholders in the business have a dispute, if you file bankruptcy, and to assess the damage to your company if your legal dispute relies on it (such as a copyright infringement lawsuit).
- Business strategy development. Your business valuation will help you look for ways to grow or cut wasteful spending. Your business valuation is important for succession planning. It will also be important for determining the best insurance coverage.
- What is the process for determining a business valuation?
As you can imagine, there is a lot of thought and analysis that goes into creating an accurate business valuation. The following steps are taken when you get a business valuation:
- Choose a valuation professional and enter into a contract with them.
- The business valuation company will request information from you, such as your financial documents, your asset records, information on the strategic staff (who are an asset to your company), and your business operations.
- An initial analysis is conducted on the information you provided to the professional.
- Using the framework established by the previous point, the valuation expert will conduct interviews with key members of the management, and will conduct an onsite visit to gather other important pieces of information.
- A formal valuation is determined using all of the information gathered. A written report is created and delivered to the requesting parties.
- How much does a business valuation cost?
You aren’t going to appreciate the answer to this question. The short answer is that there is not a hard and fast answer. The level of work that a business valuation requires varies vastly from one company to the next, depending on the purpose of the valuation itself. In fact, if you contact a valuation company and are given any pricing information before an initial meeting to discuss your needs, you should consider it a red flag. If the valuation company is giving you a flat rate, the flat rate would have to be particularly high to make it profitable, no matter how labor-intensive the request is.
You would want to get an initial consultation with two or three valuation consultants, and then have them put together proposals that include estimates for the valuation before choosing one.
Do you have any other questions or concerns about getting a small business valuation? Please share in the comments below!