First, it’s vital to understand the difference between a company’s price and the value
of a company. The price of a company is the amount paid at the time of sale. A company’s value
is the amount a potential buyer ascribes to a company depending on the return they feel they will receive. This can vary dramatically depending on the assumptions they use, synergies they may have with other assets, etc.
Second, while most valuations rely on either the discounted cash flows method or a comparison to other similar companies, there is no perfect valuation method or formula. High-quality business valuation depends on using comprehensive data. Complete and detailed information results in a more accurate and higher quality of the valuation results. Business valuation is a complex financial analysis that should only be performed by a qualified valuation professional with the appropriate credentials.
There are many reasons to have a business valuation performed, including the following:
Exit Strategy Planning –
Understand your business’s current value if you are planning to sell your business so you can develop a strategy to improve profitability and increase the value upon exit.
Buy/Sell Agreements –
Are you a partner in a partnership or LLC? If so, your organizational documents will almost certainly have a buy/sell agreement clause to help avoid future disputes between owners. Using an independent business valuation as the basis for the buy/sell agreement can prevent problems in the future and at times of crisis.
Shareholder or Partnership Disputes –
Business isn’t always easy, and partners and co-owners don’t always get along. Having an independent business valuation allows for a fair settlement of ownership interest.
Mergers and Acquisitions –
Determine if the price you are being asked to pay is overstated, fair, or even a great deal.
Financing and Fund Raising–
Are you negotiating with banks or trying to raise money from prospective investors? If so, obtaining a business valuation can help in both obtaining financings, refinancing, or raising capital.
Litigation Support –
Business valuations can help in negotiating a pretrial settlement. In the case that a matter goes to trial or arbitration, a certified business valuation expert can provide expert testimony to strengthen your case where the value of a business is an issue.
Gift and Estate Tax Planning –
Prevent IRS problems by establishing an accurate and defensible business valuation underlying your gifting of business interests.
– The equitable division of marital assets usually requires a business valuation to established an equitable division of assets.
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