For small business owners, more than likely at some point, they will need to have a business valuation completed. A business valuation sets the value of what a business is worth.
Business owners need business valuations completed in divorce cases, when couples are splitting assets, and a business’ value is a factor in the asset division. A business owner must establish how much the business is worth so their spouse gets a fair split of the business’ worth. Business valuations also are necessary if a business owner wants to sell the business—to retire or to move on to something else.
A neutral, outside party conducts a business’ valuation. Accountants, certified valuers, business advisors or brokers often complete business valuations. If your business needs a valuation, you should look for someone who has experience completing with business valuations in a thorough manner.
Business valuations have many different types, but three of the most common are the following:
- Book valuation
- Market value valuation
- Growing concern valuation
Book valuations are easy to complete. They are an accounting of a business’ total assets versus its total liabilities. Book valuations calculate any inventory, receivables, equipment or property as part of the assets of the valuation. If the business owner sells all these items in a liquidation, how much will be left after paying the business’ liabilities? That’s the figure book valuations calculate.
However, book valuations do have drawbacks. A business’ inventory often includes outdated items that might not sell. Book valuations also represent the lowest amount an owner will receive for selling the business.
If a business owner is looking to sell the business to someone else, or get a picture of its true worth, then the business’ market value is estimated. A market value looks at what similar businesses, of the same type and of similar size, have sold for recently. They establish a fair market value for what a potential buyer is willing to pay to own the business.
Growing concern valuation
A growing concern valuation looks beyond a business’ property or inventory or market value. A growing concern valuation estimates what a company’s income-producing assets are and how those might grow in time.
Before getting any business valuation completed, small business owners should talk with a business consultant and a business law attorney. Both can offer advice as to what type of valuation would be the best obtain.
Also, a business valuation can come in handy at any time—who knows when you might be looking to add a partner or merge with another company.