I have accepted the fact that our driveway currently looks like a used car lot. With five children, four of whom are driving, Annaliese and I have progressively increased our family fleet to five automobiles. Needless to say, our auto insurance premium has increased at an even faster pace—a topic for another article! In early June, we begrudgingly added the fifth vehicle to our used car collection to meet the growing transportation needs of our family. With plenty of experience buying used vehicles, the process was fairly straightforward for us. After setting an amount we were willing to spend, we identified the make and model of the vehicle we wanted to purchase, used Kelley Blue Book (KBB) to determine a fair price, and began our search. Shortly thereafter, we found the car we were looking to purchase at a reputable dealership and were able to negotiate an agreeable price. Not surprisingly, the cost of the vehicle ended up in the value range provided by KBB. We purchased the vehicle, confident that we paid a fair price as the KBB value took into account thousands of recent transactions for a similar vehicle.
If you are the owner of a closely held business, you understand that determining the value of your business is not as simple as looking up the price of a used automobile. Unfortunately, you are unlikely to find a database of transactions involving companies that look exactly like yours from which you can confidently determine value. Instead, a qualified business appraiser must consider the unique aspects of your business and utilize appropriate valuation approaches to ascertain its approximate value. We think you will agree that knowing your company’s value is an important factor in navigating significant ownership decisions.
There are various situations during the lifecycle of ownership when a company should be appraised. We have provided below some of the more common reasons encountered.
It is important to emphasize that it’s common for business owners to have different value expectations compared to potential buyers, family successors, financial partners, or tax assessors. These differing perceptions often lead to disputes, derail negotiations, or affect post-transaction plans. To mitigate these challenges, obtaining a third-party valuation can provide an objective and realistic understanding of your company’s value, offering clarity on the best path forward.
Professional appraisers commonly use several valuation methods, often combining multiple approaches to determine the most appropriate value for a specific business. The following are three commonly used approaches to valuation.
A valuation provides valuable insights into the key drivers of your business’s value, highlighting opportunities for improvement and growth. Consider the following factors:
Other Important Considerations
Understanding these additional considerations will help you have a more comprehensive understanding of your business’s value and the factors that can influence it in different transaction scenarios.
In conclusion, understanding the value of your business is crucial for making informed ownership decisions. Properly determining your company’s worth requires careful consideration and appropriate valuation approaches. Whether you’re planning for succession, engaging in tax and estate planning, offering shares to employees, negotiating with other owners, establishing buy/sell agreements, or complying with tax reporting, knowing your business’s value is essential.
This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.