What a Business Valuation Is – and Isn’t
Oct 19, 2022
When an entire specialty has been built around a single business metric, it suggests a great need in the marketplace.
But a need for what, exactly? “Business valuation” sounds like a straightforward concept, but in practice, it can mean a lot of different things.
Before you can start the process of getting the business valuation you need, it’s important to understand some key distinctions. Not all “business valuations” are the same, and some in fact, shouldn’t really be called business valuations at all.
Why You May Need a Business Valuation
In the most specific sense of the term, a business valuation is a formal process that follows consistent protocols and calculations used to establish a valuation for a specific external event or third-party request.
Such a valuation may be needed as the result of:
- Estate planning and the need to have a formal valuation for tax purposes
- Gifting ownership in a business – also required by the IRS
- Providing equity to a key employee
- Buying out a partner’s interest in the business: a valuation clause triggered upon dissolution of the partnership is often part of the original contract
These valuations adhere to a formal process and set of standards (Statement on Standards for Valuation Services) established by the American Institute of CPAs and should be conducted by accounting professionals specifically accredited to do so. When the appropriate standards are applied by accredited professionals, a resulting estimate of fair market value is obtained which is unbiased and objective.
For most business owners, however, such valuations occupy very little space on the priority list – in some cases, they may not even be aware of a requirement to conduct them.
The “business valuation” that gets far more attention among business owners is the one that answers the question, “What is my business really worth?”
What Your Business Is Really Worth
Every type of valuation of your business is important and should be conducted by experienced and qualified financial professionals. But no valuation is as dependent upon experience as the one that seeks to answer the question on every business owner’s mind.
A market-based valuation of what your business is worth can vary dramatically depending on your knowledge of the industry and the market. It’s a different process and one in which a holistic understanding of business and industry is key to determining what a knowledgeable buyer would see as the value of your business.
Unlike a formal structured valuation, this undertaking is an exercise in market analysis and due diligence. And numbers don’t tell the whole story.
You shouldn’t wait until you’re ready to sell to obtain a complete picture of your company’s value. There are many good reasons to undertake a business market analysis valuation, no matter where you are in your business lifecycle:
- To learn the true value of a business for acquisition planning
- For a clearer picture of your company’s value when evaluating an offer
- To be prepared for opportunities that may present themselves with little notice
- To position yourself to add partners or employee incentives to gain an advantage in hiring and retention
- To arm yourself with facts to ensure you are able to walk away from overly risky deals
- For developing sound buy, sell and exit strategies
- For a better understanding of your own financial health
Get to the Real Bottom Line
This is where a few grey hairs can really payoff: having a partner that understands you, your business, your numbers, and your goals is in the best position to conduct a business valuation. Far too many things can be overlooked if you rely on an inexperienced accounting partner. Having a partner with a real-world, practical mindset that isn’t afraid to tell you when you’re looking at the wrong deal, or when your estimates of your company’s value are off the mark, is critical for making the best business decisions.
At Kirsch CPA Group, we have the experience you need to avoid paying too much for an acquisition or taking too little for the business you built. We start with the underlying data, but we don’t just crunch the numbers. We dig, ask many questions, and we look past the noise to get at the true financial picture. We provide you with answers, such as why the numbers on the tax return don’t match the numbers on the balance sheet and where the market headed. Sometimes, this means building a case that helps potential buyers walk away.
With three decades of providing clients across a wide array of industries with the data, market insights, and business acumen they need to make better decisions, the Kirsch CPA Group is your secret weapon in the business valuation process.
Our holistic approach means we come to the process with a deep understanding of your business and what it will take for you to reach their goals.
Our business valuation professionals are Accredited in Business Valuations (ABV) and have deep experience in both market analysis and traditional business valuations. Either way, we focus on what it will take to move you closer to your goals. It’s more than what we do, it’s how we do it.
Contact us to learn more about our business valuation service