Why Have A Business Valuation Performed?

Summary: Provides a list of some of the top reasons when and why you should consider having a professional business appraisal performed on your small business.

As a professional small Business Broker I am occasionally asked by some small business owners when and what are the appropriate times or reasons to have a formal business valuation or appraisal performed. Although I can often give small business owners a general idea (using traditional pricing guidelines) about what their existing business might be worth for selling and listing purposes, there are many times when having a more formal business appraisal performed by a professional appraiser is much more appropriate and prudent. Below you will find a list of some of the most common scenarios that you should consider having a professional and independent appraisal performed on your business.   

Legal & Litigation Issues:

Unfortunately it’s a fact of life that if you own a small business there is a decent chance at some point you will need to have a business appraisal performed for some legal purpose. In my experience as a small business broker the most common legal issues that precipitate the need for a formal business valuation or appraisal are personal divorce and partnership disputes.  Less common reasons would include shareholder disputes, the establishment of an ESOP (Employee Stock Ownership Program), and eminent domain related issues. Regardless of the specific legal issue, an appraisal report created by an independent and professional small business appraiser is often one of the most important tools used (and often required) to help settle or resolve small business legal issues.

Tax Related Issues:  

Tax related issues such as gift and estate planning will require a detailed business valuation report to be prepared and updated on regular basis. Generally it’s considered prudent to have a valuation prepared in advance to help address the inevitable transfer of ownership that will occur at some point down the road as well as possibly help mitigate any tax burdens due to the owners passing. It’s prudent to always consult with your financial adviser and CPA as well when doing estate planning.

Business Financing:

I can tell you from experience that most small business lenders will automatically require a detailed business appraisal performed as part of their due diligence before approving financing for any number of reasons. A third party and professional appraisal can also be an important tool to have on hand when an owner is seeking new partners or private investors to help grow the business. Having a recent appraisal report included in your presentation package could help validate your business model and show your potential new partners or investors that you are well organized and mean business.

Business Sale or Acquisition:  

Whether you are selling or buying a small business having a professional and independent appraisal or valuation performed can be very helpful indeed.  For sellers an appraisal report can be used to help validate and support the asking price of your business which will ultimately maximize your return on investment. For buyers an independent appraisal report can potentially be very helpful when negotiating the final sales price and terms of a business acquisition. It can also give you peace of mind that you are not grossly over paying for a business.  A third party appraisal report is also indispensable when determining the value of a business in preparation for negotiating the terms of a potential partner buy out as well.

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