Your business may be priceless, but what’s it really worth?
A business valuation brings an objective answer, backed by data.
Asking tough questions is part and parcel of running any business. To hire or not to hire new staff? To add or drop a product line? To build additional warehouse space or move to a new location across town?
The one question that rarely gets asked of privately held businesses, or is asked at a time that’s pivotal and sometimes inconvenient, is what is the worth of my business? What’s its true value?
The reasons for the question may be varied, but the answer can have profound effects – on your asking price for the business, the selling price, the distribution of assets to your heirs, the amount of additional financing your business can obtain, or even on the settlement of an owner’s divorce. And without a solid, realistic number in place moving forward with any sense of certainty becomes difficult, if not impossible.
To gain a true measure of your company’s worth requires a detailed and analytical assessment provided by a business valuation professional. The JCCS business valuation team has experience with businesses of all types and sizes – from construction and manufacturing to professional services firms to yoga studios – and can provide a realistic, fact-based picture of where your company’s value sits relative to its specific market and industry.
Lots of reasons for a valuation. Selling is but one.
The decision to conduct a business valuation is often prompted by the decision to sell. While the most obvious reason, there are other points in a privately held business’s life when it’s time to take an objective look at its worth.
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In addition to setting a for-sale price, a business valuation can also be strategic. It can be useful for identifying areas for improvement, such as needed capital upgrades long before you are ready to sell, as well as playing a pivotal part in succession planning or when gifting a business as part of your tax strategy.
Furthermore, a baseline business valuation may be the sole source of knowledge and information if key personnel in your business leave or die.
As a result, you are better off conducting a valuation with forethought rather than hindsight.
Valuations customized to client needs.
Depending on the complexity of your business and your reason for a valuation, JCCS can tailor the engagement or scope of work to be done. A calculation engagement is good for internal purposes or when you are contemplating a sale; a full-scope business valuation engagement is typically required for legal reasons and by the IRS.
The full-scope business valuation engagement process has five distinct steps:
1. Define the scope of work
– Consider this an introduction of you and your business to the JCCS valuation team. Areas addressed here include the purpose of the valuation, the responsible parties, the valuation date and other groundwork topics. In addition, the valuation team will determine the standard of value, level of value, and premise of value to be used.
2. Gather information
– This in-depth fact-finding process works to understand the nature and history of the business, its earnings capacities, financial condition, key customers and suppliers, and the economic outlook for the particular industry. Depending on your business this step may include a site visit.
3. Analyze the information
– Included in this stage is a financial analysis that looks at historical trends, forecasts, and industry data comparisons. It also includes adjusting financial statements to account for related-party transactions, such as owner’s compensation, and unusual or nonrecurring items.
4. Determine an indication of value
– Here a decision is made as to the appropriate method for valuing a business based on three common approaches:
• Income – Value is determined based on a company’s cash flow.
• Market – Value is determined based on the sale / purchase prices of similar companies.
• Asset – Value is determined by adding up the business’s assets and subtracting liabilities to get an adjusted book value.
At this stage, a valuation will also include a determination on the appropriate cost of capital and if discounts or premiums are necessary to reflect a lack of marketability or the presence / absence of control.
5. Issue the valuation report
– Most JCCS business valuations can be completed in three weeks or less if all the company’s paperwork is in order at the start of the engagement process. The cost for a valuation is based on a number of factors – the size of the business for one – and is established after a discovery meeting to determine the business’s current situation and needs.
The shelf life of a valuation will vary depending on your business and the volatility of the market in which it operates. Depending on the complexity of the business and future plans, it may prove worthwhile to conduct a valuation on a regular, scheduled basis.
Even the most thorough valuations come with caveats.
While a business valuation is based on deep analyses, it does not include a crystal ball. Unexpected market conditions, changes in management and off-balance-sheet liabilities, such as an environmental cleanup, aren’t typically factored in. And, of course, the accurateness of the outcome is only as good as the accurateness of the information that goes into it.
A valuation can be a powerful fact-based tool for answering a range of tough questions that come with running a business, providing you with valuable insights for successfully navigating your business’s future.
To learn more about business valuation and how this analysis can benefit you and your company, contact JCCS’ business valuation team.
