If you own your own business, you may think you know what it is worth. After all, you may have created it and built it from the ground up. Who would better understand its value? That may be true, but if you need to sell or transfer a business, you should obtain a professional assessment of your business’s value.
You may need the valuation in order to sell to a third party. In that case you may be looking to maximize your value, and receiving the highest price possible. You may want to transfer the business to your children, and in that case, you may want the lowest possible value to minimize the impact of taxes on the transfer.
Above all, it needs to be accurate, as the Internal Revenue Service (IRS) will be examining the valuation for signs that it has been unduly manipulated to obtain a desired result and maintains a reasonable relationship to the concept of fair market value.
However, do not expect that two appraisals will exactly match. Determining a business’s value is a complex process and there is no “right answer,” but instead, there is a range of reasonable valuations when selling a business.
Your type of business will also affect the method used to calculate the value. If you have a service business, much of the value is likely to be tied up in cash flow and goodwill. For a manufacturing business, the capital assets are likely to be expensive and retain a greater share of the company’s value.
A through examination of all elements of the business is necessary, from the salary of managers to depreciated tax valuations of equipment. The purpose of the valuation is important as is the choice and experience of the appraisers.
It is also important to remember that valuation is dynamic, and can change depending of many outside forces, so a fair valuation from five years ago may not be accurate, nor will today’s valuation necessarily be accurate in the future.
Forbes.com, “What’s Your Business Worth? 5 Steps To A Favorable Valuation,” Northwestern MutualVoice Team, January 6, 2015