As a business owner, you might face a number of situations in which you’ll want to value your business. Depending on the situation and the timing, you’ll want to consider the circumstances that warrant getting your business valued, who will be looking at the valuation - and the amount of time and money you’re willing to spend.
The answers to these questions will help you decide which is best: a full business valuation or a calculation of value.
What is a business valuation?
A full business valuation is an official report that determines the value of a business based on:
- Extensive documentation about the company’s financial history;
- The value of the business’s current assets;
- The current state of the industry;
- Information about the company’s past and present management; and
- The company’s projected financial forecast.
A well-written business valuation will include a detailed overview of the company and an explanation of how its value has been determined.
When should you get a business valuation?
You’ll need a business valuation when the IRS or a court requests it as part of a formal review, or when you’re discussing a merger or acquisition. Third parties will want to see detailed information on how your company’s value was determined. In the case of buy/sell agreements, each party may bring in their own valuation expert to do their own valuation.
Business valuations are also useful in estate planning as they help determine how much of a business to leave to heirs, and how much each slice is worth.
What is a calculation of value?
A calculation of value is a much shorter report. The valuation consultant and the company director(s) decide what background information to use to determine the company’s value. This information is less extensive than that of a business valuation, but the business is still analyzed in the same way.
A calculation of value usually costs a lot less than a complete business evaluation and is perfectly adequate when a business is straightforward.
When should you get a calculation of value?
A calculation of value is perfect when a third party or legal document is not involved. For example, if you are considering selling your company and want to get a rough idea of what a good offer would be, and will just use that information internally, a calculation of value is the best option.
If everyone involved is well-informed about the company, and already knows all the details that a full valuation includes, a calculation of value is adequate. You only need a formal business valuation when the valuation will be presented to outside parties who don’t know the company well.
Summary
If you need a business valuation for official use with a third party, such as the IRS or a court of law, you’ll need a full business valuation. If you simply need a valuation for internal use or need to keep costs low, opt for a calculation of value.
If you need help valuing your business or would like to schedule a consultation with one of our Certitified Valuation Analysts (CVA), just click the button below.
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