Sep 13

You’re working diligently on your business.  The finances are in reasonably good shape and you’re feeling pretty confident that the business is on solid financial ground.  But do you really know what your small business is worth?

The issue with many business owners is that they tend to inflate the real value of their business for many years.  Then when the time arises to sell, retire or pass the business down to a family member or partner, they are shocked at its true value.  By putting off what you could have done today, you’ve also lost critical time, often years, when you could have made preventive adjustments in your business strategy that would have provided a greater sales value.

What is a business valuation and why should you do one?

Business valuation is the process of discovering the true, fair, or ‘street’ value of your business.  There are a handful of tried and true methods for performing such assessments, but the most faithful is the Discounted Cash Flow where a company’s value is based on its ability to generate sustainable long term cash flow.  There are, of course, many other factors that come into play when doing a valuation including:

·         Liquidation Value – The amount of cash generated from complete sale of your business’ assets,

·         Excess Earnings - Earnings paid above and beyond the expenses,

·         Multiples Model – This is where earnings/sales are multiplied by the price to earnings (P/E) or price to sales ratio (P/S) of comparable public companies and,

·         Comparative Cash Flow – These are similar to housing marketing assessments done by real estate agents.

More difficult areas to assess include intellectual property and other intangible ‘value’ assets within the organization.  A PASBA small business accountant or business valuation firm can assist you with defining more esoteric ‘values’.

Reasons to perform a business valuation:

1.                  Hard Facts – A valuation will enable you to truly understand and know the sale value of the business rather than making costly assumptions.

2.                  Legal, tax, and planning purposes – In the event of a divorce settlement, estate planning, or forming partnerships, having all of your legal and tax issues addressed in advance will streamline the process.

3.                  Growth – With the facts in hand, you can now plan for future growth, including raising capital, and take advantage of business opportunities as they present themselves.

4.                  Transition / continuation planning

5.                  Selling the Business

Depending on your motivation for performing a business valuation, there are several possible ways to interpret the data.  If you’re improving the value of your business for the purpose of selling, you’ll want the highest possible valuation.  If you’re seeking the valuation based on a future contribution to a charity or in gifting the business to a relative, you’ll want a lower valuation for tax purposes.  In litigation, the valuation can go either way depending on if you’re the defendant or the plaintiff.  No matter what the purpose, the best investment you can make is to utilize the most reputable business evaluator you can afford.

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations. To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice.  Any information contained in this article does not fall under the guidelines of IRS Circular 230.

Copyright Information 2011 Professional Association of Small Business Accountants