Selling your business: the importance of a business valuation
As a business owner, it’s unlikely that you will make the decision to sell your business overnight. Rather, the motivation to sell will manifest itself over time. From a tax and accounting perspective, there are several moving parts to consider. A business valuation is key to facilitating the sale of your business. Whether it’s identifying buyers, making a succession plan, or formulating other aspects of your exit strategy, this blog will focus on the importance of obtaining a good business valuation.
A business valuation provides management with insight into the present value of the company. To a prospective buyer, however, a business valuation sheds light on the profitability and future earning potential of a business, enabling them to arrive at a purchase price. Moreover, while business valuations have numerous use cases ranging from strategic planning to exit strategy planning, buying or selling a business, most business professionals rely on valuations as the basis of decision making for current and future activities
The process of arriving at an accurate valuation can be completed using a variety of techniques which take into consideration a variety of criteria. Primarily, a valuation analysis will focus on management, future earnings potential, market value of assets and capital structure. A business valuation can also determine the fair value of securities. Regardless of the techniques used, the circumstances will also play a factor in the valuation. For example, a forced sale will drive down the valuation (for example, in the event of insolvency or other pressing situations). Other factors include the nature of assets (including whether or not they are tangible or intangible) and business maturity (as younger companies can make a loss in the early stages of growth).
As discussed earlier, there are several business valuation techniques that can be used to arrive at a price for business. Most professionals will employ at least two methods to arrive at a figure. An asset valuation is used for businesses with tangible assets. The price-earnings ratio is used to value a business with a regular, predictable stream of profits. And a discounted cash flow valuation is based on future cash flow, which is suitable for those businesses that have made significant investments and expect steady cash flows in the future. An industry valuation can also be used to provide an accurate valuation based on industry standards.
The nature of arriving at a valuation is complex and is carried out by valuation experts who hold relevant qualifications. At Veritas, our accountants are experienced in providing valuations for your business. We frequently prepare business valuations for clients who often need to know what their business is worth in preparation for a sale, merger, purchase, or to simply monitor how the business is performing against its goals. If you’re considering selling your business, please contact us to discuss your business valuation today.