Top 6 Reasons You Need a Business Valuation



A business valuation is more than just an outsider's opinion on how much your company would be worth if you were to sell it. By providing an objective assessment of your company's worth, a valuation helps you prioritize initiatives that will increase growth, profitability, and shareholder value.


This article will explore the top 6 reasons why a business valuation is necessary.

Exit Strategy

A business valuation helps organizations evaluate their strategic direction and market worth. This is critical during a recession or rapid transition. The business valuation process determines how much cash a company needs to expand, appraise its real estate assets, or purchase other companies.


Business valuation determines a company's shares, bonds, or other assets' market value. This can be used to negotiate with investors or lenders for investment or acquisition finance. In addition, business valuation advises investors on how much to invest in securing fair returns.

Estate & Gift Tax

Decedents' real and personal property are subject to estate and gift taxes. The federal estate tax is imposed on a person's gross estate upon death. The federal gift tax applies to lifelong cash and asset transfers to relatives.


Business valuation data can be utilized with your income tax return to determine gift or estate taxes.

Mergers & acquisitions

A business valuation helps acquirers assess the worth of a target company. To establish this value, a buyer must know how much the target company's assets and liabilities cost.


Buyers want to know if they're overpaying for a target company's assets or liabilities. Business valuations provide answers.

Buy/sell agreements

A corporation may need a valuation before creating a buy-sell deal. These contracts are tax and business-friendly. An estate or gift tax assessment may be necessary if a sale involves related parties.


A buy/sell agreement allows the surviving owners of a closely held corporation to buy out a retired, leaving, or deceased owner's shares. These contracts incorporate a defined price or formula to simplify selling an existing owner's interest.


A valuation analyst must periodically evaluate this pricing or formula to track the company's performance.

Shareholder & partnership buyouts/disputes

Buy-sell agreements reduce friction in partnerships and LLCs. When bargaining, it helps to have an agreed-upon price in mind.


Common reasons for a shareholder buyout in a closely held business include retirement, the introduction of a new partner, the death or divorce of an existing shareholder, or a conflict amongst shareholders. Costs associated with resolving a dispute about a buyout's fairness might mount if one party feels they were treated unfairly.


Even with a buy-sell agreement, shareholders may need a business valuation specialist.


A business valuation can help lessen the risks of a shareholder buyout by completing a thorough and defensible valuation analysis and writing a report on the firm's worth and value.

Marital Dissolution (or divorce)

Business valuation helps divorce since both parties know their rights and obligations.


A company valuation report includes each party's assets and debts, which can be used to calculate child support or alimony.


The business value report also shows divorce settlement amounts. This protects your rights as a business owner and prevents either party from misrepresenting financial information or hiding assets.

Conclusion

These were the top 6 reasons every business owner must undergo business valuation. A business valuation will give the owner a transparent view of the business performance and help in situations like disputes or divorce.


If you're seeking business valuation services, Arrowfish Consulting is your go-to solution. A team with 200+ years of combined experience and certified business valuation experts can help you stay on the right path and have a fair view of your business growth.


There's even a full-fledged blog dedicated to this. Click here to read it.

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