When do I need a Business Valuation?
In a world of transitioning businesses, there are times when business owners ask the question, “How much is my business worth?” Well, that depends. Do you want the formal, semi-formal, or informal answer? (Those are not technically the technical categories, but it’s how I like to explain valuations.)
The shortest, least costly way to answer that question is a Seller’s Discretionary Cash Flow analysis, which takes your business P&L and converts it to a presentation of what the actual cash available to business owner has been over the last few years. This isn’t a standard presentation for tax or accounting CPAs, so you have to find someone who has experience with this kind of analysis. Then, by looking at business sales in your industry, a multiple can be determined that represents an average of what other businesses have commanded in arms-length transactions in the recent past. This is a great way to give you a ballpark figure for the price you might be able to negotiate in the sale of your business. (This analysis is also a great first step in the conversation of, “How can I increase the worth of my business over time?”)
The next level up in the field of valuations is the “calculation engagement.” That is the official name for it but, between you and me, this is the “semi-formal” option. This kind of report provides a calculation using valuation approaches and methods that the valuation analyst and the client agree upon. This necessarily means that certain methods will be ignored. That is not allowed in an official valuation engagement, so that’s why a different level of service has been defined for those cases where it is not important to consider all approaches in order to render a value. Of course, cost is one factor that clients use in deciding whether to do a calculation engagement or a valuation engagement, but the most important factor is actually the defensibility of the opinion. If the opinion will be used in a court proceeding or in a tax determination presented to the IRS, then a calculation engagement may not be robust enough. However, if the opinion is being used to negotiate the price of a business, or the price of one partner/shareholder’s interest in the business, a calculation engagement might be a good fit.
The final level is the full valuation engagement. I’m talking the tux, the tiara, puttin’ on the ritz. There are industry protocols and standards that must be included in a valuation engagement, so for this level, you definitely need someone certified in valuations! There’s a lot more time and cost involved in this engagement because all the approaches to value must be considered, and the most applicable one is chosen to develop an estimate of value. This level is needed if the value will be deliberated in court, or by the IRS.
This introduction to the levels available when discussing the value of your business will help you determine what your goal is in obtaining a value. At Sweeten CPA, we are ready and able to help you find the best fit for your quest in answering this big question: How much is my business worth?