What are business valuations?
"The process of determining the economic value of a business or company. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership and divorce proceedings. Often times, owners will turn to professional business valuators for an objective estimate of the business value." - Investopedia
A business owner’s largest asset is the investment in their business, but few realize what the value of their business actually is.
Understanding a business's value can help its owner(s) make decisons regarding but not limited to, the following:
- Buying or selling a business
- Gift and estate planning,
- Creating a succession plan,
- Filing an insurance claim
In order to fully understand the value of their business, business owners should consider having business valuations performed.
A properly prepared business valuation provides management with insightful information that helps identify company strengths and weaknesses which affect value, allowing management to more effectively focus its energies in places that really count.
A business valuation, prepared periodically, also serves as a management tool that helps owners evaluate overall progress towards goals and management effectiveness.
There are two different types of valuation services.
To help distinguish between the different levels of services for estimating the value of businesses, valuation services are often divided into two types: valuation engagements and calculation engagements.
According to the AICPA;
A valuation engagement results in a conclusion of value, which is basically an opinion on the value of the business or ownership interest, and it requires more procedures than a calculation engagement. (These engagements, often referred to as full-blown valuations, are typically more costly.)
A calculation engagement, results in a calculated value, which can be expressed as a single amount or a range. This type of engagement does not incorporate all of the procedures required for a valuation engagement. The valuation professional and client must agree in advance on a) the approaches and methods that will be used and b) the extent of procedures that will be used to calculate the value of a business or interest, and the valuation analyst must follow that arrangement.
It's important to recognize the difference between a full valuation engagement and calculation engagement. The last thing that you want to do when having a valuation performed is pay too much to a valuation professional to obtain a conclusion of value that will only be used for planning purposes or pay too little to obtain a calculation of value that will not hold up in litigation or under IRS scrutiny.